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Steve Webb: DB transfer demand? You’ve not seen anything yet

Pressure on schemes to be more transparent and an upcoming change to EU law are expected to make pension transfer business soar

One question that often comes up when I meet advisers around the country is whether the current volume of defined benefit to defined contribution transfers is likely to last.

It is already evident this year is likely to see a substantial increase in volumes over 2016, with advisers telling us increases of 50 per cent or more on a year earlier are not uncommon.

But what about the medium term? My view is this market could have a lot further to run.

The reason for this is that most deferred members of DB schemes appear to be largely in the dark about their pension rights. Most schemes do not regularly communicate with their deferred members, so many people have little or no idea of their current value if converted into a lump sum.

More surprising still, a recent survey by consultants Lane, Clark & Peacock found only around 30 per cent of schemes routinely provided transfer values as part of retirement communications. So at the point when members are most engaged in looking at their retirement options, the majority of schemes are still not giving them basic information about the value of the rights they already hold.

That said, trustees are increasingly being challenged about whether withholding this information is really in the best interests of scheme members.

It is understandable they do not want to be seen to provide advice or to lead members in a particular direction, but there is a risk they could be challenged for failing to provide key information about accumulated pension rights.

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LCP reports that, although a minority of schemes routinely provide transfer values in retirement communications, this proportion has risen markedly in the last two years and seems set to continue.

There can be little doubt the supply of this information to more people approaching retirement will fuel a further growth in demand for transfers.

This growth could be further reinforced by the implementation of an EU directive known by the catchy title of IORP 2. This will require all occupational pension schemes to provide an annual Pension Benefit Statement to members, including deferred members.

This directive is due to be implemented by January 2019, ahead of the UK leaving the EU by the end of that March, so is likely to have an impact.

Many EU directives currently being implemented into UK law will be part of our law post-Brexit unless we make an active decision to abolish them.

And it is hard to think why the Government, which is interested in getting people more engaged with pension savings, would scrap a law requiring pension schemes to tell their members about their rights.

While the statement will not have to provide a transfer value, it will remind workers of rights they had forgotten about and may well prompt a renewed interest in doing something with their old pensions.

There are currently just over five million people in Britain with deferred memberships of a DB scheme. The number who undertook a DB to DC transfer last year was around 80,000. Even with a 50 per cent increase to 120,000 this year, that still barely scratches the surface of those who have such rights.

And the value of these rights is truly eye-watering. Suppose the typical deferred pension is worth a relatively modest £5,000 per year and that schemes offer a multiple of 30 times the annual pension as a lump sum.

Multiplying £5,000 times 30 for five million people suggests total potential transfer values for deferred members could approach three quarters of a trillion pounds.

While there is still a regulatory presumption the majority of these five million people should leave their money where it is, the scale of these entitlements suggests there will be enough people for whom transfers are worth serious consideration to make sure this market remains vibrant for some time to come.

Steve Webb is director of policy at Royal London

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. I would suspect that the more informed members, such as the investment professionals that I deal with, will have taken advantage of the higher transfer values and already arranged their transfers.

    The problem that I see is that the business risk goes up as the more borderline cases appear and transfer values reduce, there could be a lot of demand but equally a lot of declines. With greater scrutiny from the FCA this will lead to stricter compliance and PI insurers refusing to cover, so I would expect to see less cases suitable for transfer in the future.

  2. I fear he is right ….

    CETV’s are high, and all people see is pound signs…. advisers and clients alike

  3. Not clear if the 5m deferred members referred to includes unfunded Government schemes ??

  4. Ask this question, if the Employers are required to fund the “Real” cost of the schemes, due to the on going “stripping out” by the current stampeded of transfers, What will happen to the existing members already retired when the scheme goes into default, clearly we have a National Scandal, Just around the Corner, and this one “can” not be “kicked down the road”

  5. As an adviser I feel like a passenger of a plane crash, falling to certain death with no way out.
    There is a real danger for all advisers. You charge a fee and refuse to transact a DB Transfer, later, in hindsight this was wrong, you will be liable, you gave advice and charged a fee. You can try to defend but past FOS judgements cannot give either certainty or confidence.
    If you transfer, the client runs out of funds human nature will be its the advisers fault, no matter how many or how good your warnings were. Again the FOS past rulings and outcomes cannot give any certainty.
    Mean while those being paid a fortune to regulate, sit back and wait, only when it is clear which option was incorrect will they act, knowing all to well they cannot be seen to be liable in any way taking this action.
    PI Insurances providers are correctly worried and looking to leave the market as they have no means to calculate or even asses the business risk. A national shortage of Pension Specialists means those holding the permission are inundated, which will mean the PI cover is likely to go through the roof or be refused. Costs are being driven upwards all around and we the advisers can do nothing.
    Does anyone else feel the crash to come is likely to make PPI look like a shop lifter running off with a mars bar?
    When will those on six figure salaries act within the regulatory departments. I find it incredible they are allowed to regulate not even holding the basic exams and knowing less then those they regulate. That they can take years to make any decision whilst billions are lost, stolen and even longer to take any action.
    How long before someone in Government actually takes action and forces action?

  6. Last evening I spent two hours running through a DB transfer proposal with a client, she is using another adviser as I will not get the qualifications, However having asked her what fee agreement she had made to do the transfer work and implementation, she stated the Adviser would not be charging her anything as He is “Paid out Of the Plan charges” I asked her then how much she thought the adviser was being paid for the Advice, she had no idea, when I pointed out the figure on the last page of the illustration, hided in the second to last file given to her, the Figure of £12,900 was stated equal to 4.45%, However the reduction in yield is 1.7% for six years which is £4896 p/year, but it does not stop after six years, it just the Exit charge which reduces over the years, When I explained to her the alternative options ie 0.45 R/London ect; she started crying! And we all know who the Tied Agent Representated

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