Up to one million DB members may transfer out over the next 10-20 years

One million defined benefit members are likely to explore their options over the next 10-20 years, writes John Hatchett, Hymans Robertson

The Financial Conduct Authority is looking at defined benefit (DB) transfers because the numbers cashing out of DB pensions have soared since Freedom and Choice. Twice as many people transferred in the first year following the introduction of pension freedoms. Momentum is increasing due to record high transfer values making DB transfers more attractive - both to members and to scammers. Many of those transferring won’t have had appropriate support and advice which is worrying. Whether individuals stay or leave the scheme, there are huge risks members could make poor decisions with a life-changing and life-long impact.

If DB scheme members are unsupported and make the wrong choices this could come back to bite trustees and employers. Evidence suggests most employees expect support with the complex 'at retirement' decisions. Trustees of DB schemes have a moral duty to protect members. They work hard to safeguard the valuable benefits promised to members. Ensuring individuals make the right choice when making one of the biggest financial decisions of their life is a natural extension of trustee duties. Members staying or transferring must do so on an informed basis and with access to quality advice.

Indeed if schemes facilitate the process rather than leaving members to fend for themselves, this could save around £4bn of advice costs across UK DB whilst ensuring the advice is of good quality. That’s because facilitating the advice process can save around £4000 per scheme member in advisory fees.

Putting in place a preferred adviser for a scheme can bring dramatic efficiencies and cost savings. Retail customers can pay £5,000 plus for DB transfer advice, yet the average cost for a scheme-appointed adviser is more like £1,000. Multiplied by the 1 million DB members likely to explore their options over the next 10-20 years, this leads to a potential saving of c£4bn across UK DB, and at the same time ensures members make decisions on an informed basis with access to quality advice. Our clients’ experience points to the fact that finding an adviser combined with high advice costs prevent members from engaging in their options.

FCA proposals

Much of what the FCA is suggesting is just good, common sense. It appears to tie in the value of redress much more closely to the actual cost of the member replicating their DB benefits. Given the volatility in markets, with a £200,000 transfer value fluctuating by as much as £40,000 in a single year, updating assumptions on a regular basis is hard to argue against.”

They are retaining assumptions for people’s marital status, which does simplify calculations but will lead to winners and losers on the ground. People either have a partner or they don’t, few are “80% married”. With spouse’s pensions typically being worth around 20% of the members’ benefits, in reality this will lead to windfall gains and losses. You can see why the FCA has opted for simplicity, but some will argue that a bit more accuracy here would be welcome.

The headlines changes seem to ignore the possibility that transferring away from DB might be the right option and people are misadvised to remain in their scheme. With leading luminaries in the pensions industry and reputable broadsheet opinion writers extoling the value of at least considering a transfer value, perhaps the FCA is missing a trick here. Tax advantages, investment returns, reducing exposure to their former employers and leaving DB before the potential bursting of the bond market bubble might all be good reasons to leave. It is not clear what redress would be offered in this case.

 

Jon Hatchett is head of Corporate Consulting at Hymans Robertson.