The stampede of savers rushing to ditch their valuable guaranteed defined benefit pensions shows little sign of slowing. In the first quarter of 2018 alone some £10.6bn was moved between pension schemes, according to figures released by the Office for National Statistics last month.
To put that in context, prior to the introduction of the pension freedoms this figure barely breached £2 bn (see graph). While the ONS doesn’t split its analysis out by scheme design, we believe the vast bulk of the recent increases in activity are down to a surge in the volume of DB transfers.
This spike is hardly surprising. In recent years, we have witnessed something approaching a perfect storm of political and economic factors nudging people towards the DB exit door.
First and foremost among these are, of course, the pension freedoms. By stripping away the minimum income requirement and allowing everyone total flexibility over how they spend and invest their retirement pot from age 55, the government created an environment that people in all types of scheme were obviously going to find attractive.
Reforms to the way benefits are taxed on death also swung the pendulum in favour of DC, with pensions effectively turned into tax-efficient planning vehicles clients can use to cascade wealth down the generations.
Away from the pension freedoms, persistently low gilt yields have driven up the liabilities recorded by DB schemes. This has in turn pushed up the transfer values on offer to members, with reports suggesting multiples of 40x or even more were not uncommon as desperate corporates attempted to offload pension risk from their balance sheets.
Without a willing army of advisers to help savers, DB transfer activity will inevitably drop off
There was also a sense of ‘buy now while stocks last’ for DB members, with experts regularly predicting the transfer sums on offer would fall as gilt yields inevitably pick up. One headline in a national newspaper from December 2016, for example, read: ‘Why now is the time to cash in your final salary pension’.
Add to that a string of negative headlines about savers in DB schemes losing out following high profile failures at a number of huge firms – most notably BHS and Carillion – and a general lack of understanding of the underpin provided by the Pension Protection Fund, and you’ve got a pretty heady pension transfer cocktail.
It is possible we are somewhere near the peak of DB transfer activity. Many advisers are understandably reticent about acting as the last line of defence, fearful they’ll be on the hook for complaints long into the future if a transfer goes wrong.
Furthermore, the FCA continues to scrutinise the market closely – particularly in the wake of the scandal that recently engulfed the British Steel scheme.
Indeed, the January deadline for British Steel members to make a decision about transferring likely contributed significantly to the record figure recorded by the ONS in the first three months this year.
Difficulty getting professional indemnity insurance is placing a further constraint on the supply of advice. I was struck by the number of investors who complained to me at a recent conference about the difficulty in finding a qualified adviser willing to take on their transfer case. Without a ready and willing army of advisers to help savers, DB transfer activity will inevitably drop off.
More fundamentally, you would expect DB transfer activity to diminish as the population of people with guaranteed pensions dwindles. Over time – assuming there isn’t an unexpected DB renaissance in the UK – transfer activity will inevitably trend towards zero.
I was recently asked if I thought the amount of money moving out of DB schemes was the “next big misselling scandal”. As a former journalist, I was fairly certain the publication in question had already made up its mind before I answered.
The reality is it might take years – even decades – for the implications of the decisions people have made since April 2015 to be fully understood.
That said, a downturn in investment performance for those who have opted to take risk with their DC pot – and logically you’d expect most would have – could have disastrous implications pretty quickly for some.
For those who have ignored the recommendations of their adviser and opted to transfer on an insistent basis, however, it is far from clear against whom a claim for misselling would be lodged.
Tom Selby is senior analyst at AJ Bell