DEFINED BENEFIT TO DEFINED CONTRIBUTION – SOME EXTRA CONSIDERATIONS
Since the introduction of pension freedoms on 6th April 2015, Defined Benefit (DB) pension transfers advice is topical. One ‘fly in the ointment’ is that members in defined benefit schemes can’t access much of what is good in relation to such reforms. So, if you are a single man or woman with no dependants you are a bit stuck… Also, there are still many companies that view all DB pension transfers as ‘bad advice’.
Whilst it’s right that caution should be applied when advising any DB scheme member to give up guaranteed benefits for the perceived advantages of a DC scheme, is it fair to continue to apply the same rules and advice standards to a pensions market which has changed beyond recognition?
So, what does the regulator say?
The regulator view is that, in most cases, you are likely to be worse off if you transfer out of a DB scheme, even if your employer gives you an incentive to leave. The cash value may be less than the value of the DB payments to you and your eventual pension payments will depend on the performance of the new scheme, with the risk that the scheme does not deliver the returns that you expect.
The question remains - does this negate the fact that a single person with no dependants, who may have 30 - 40 years’ service in their DB scheme, will not get value for money in what they receive in pension payments unless they live a very long time in retirement.
When they die, their pension is also likely to die with them, and they are also denied the ability to access more in cash or to use the new nominee or successor categories.
The temptations to carry out a DB transfer for a client are great.
Cash Equivalent Transfer Values (CETVs) being quoted by DB schemes are eye wateringly high due to poor annuity and discounting rates. Also, the UK’s decision to leave the EU following the Brexit vote has meant gilt yields have fallen, pushing transfer values to record highs. UK 10-year gilt yield now stand at a record low of 1%, increasing DB scheme liabilities and, as a result, CETVs being quoted.
In the summer of 2016, Telegraph Money spoke to Simon Major, who had been offered £1.3m to transfer out of his scheme and give up a £40,000 annual pension. This was without an employer ‘enhancement’ to encourage the member out of the DB scheme! The sum equated to 32.5 times his annual pension, a historical high, and he has since gone ahead with the transfer.
Similarly, another reader, John Clarke, was offered £719,000 to give up his £28,000-a-year pension last year. However, the offer has since improved even further, rising by £162,000 to £881,000; a multiple of 31. Mr Clarke, who was undecided about the original offer, has now decided to transfer.
Demand for pension transfers appears to be reaching fever pitch and pension transfer specialist firms are seeing record levels of enquiries, fuelling a surge in business in recent months.
Intelligent Pensions have seen DB to DC transfer enquiries soar and believe this is a trend that is reflected more widely.
Head of pathways Andrew Pennie says: “Demand has undoubtedly gone through the roof since pension freedoms came in. We used to write one or two pension transfers a month, we are now getting around 30 enquiries a month. That is a significant uplift, and I would imagine firms that are specialising in pension transfers are seeing the same thing. The majority of this is being driven by customers. One person in a company might become aware of pension freedoms and what it means for them, and they will tell a friend or someone they work with. It seems to be growing by word of mouth.”
So, what stance should advisers take?
DB transfers advice is mainly based on the ‘critical yield’ system. Many in the industry now see this as an outdated system. While a poor comparison or a high critical yield to match may make advice to transfer look less suitable, it is no longer the only factor. Individuals particularly keen to take benefits from an earlier age or in a more flexible way may place a high value on the pension freedoms. Should advisers be able to take this, and also any concerns over the employer’s ability to deliver promised benefits, into account?
What we badly need is an updated regulator steer. The regulator has indicated it plans to revisit the approach to calculating compensation when advice to transfer from DB to DC is deemed to have been inappropriate. Before doing so, we need some clarification to advisers and companies that it is perfectly right to look beyond historic TVAS methodologies when considering a DB to DC pension transfer.
Watch this space for any further updates...