The flood of defined benefit (DB) transfers is showing no sign of slowing, and the regulator’s planned rule changes will do nothing to stem the flow.
Just over two years since the pension freedoms came into force, £50 billion has been transferred with around 80,000 DB transfers last year alone.
According to a poll by The Lang Cat for the Great Pension Transfer Debate event, one in five advisers said over a quarter of their business now came from transfers.
Low gilt yields are pushing up transfer values and that situation does not look likely to change just yet. This means the people wanting to transfer their DB scheme are unlikely to suddenly stop knocking on advisers’ doors.
Herd mentality most likely means once the wave of transfers start it is incredibly difficult to stop. When people hear about their colleagues being offered thousands of pounds for their DB pensions and going ahead with a transfer, they will no doubt want to do so as well.
In the Norwich area, New Model Adviser® has heard stories of former Norwich Union employees, now Aviva, being offered exceptionally high transfer values. Middle management staff on salaries of £70,000 were supposedly being offered more than £1.5 million for their DB pension.
Whether in small towns or in office kitchens, such DB transfer gossip travels fast.
Lost in translation
Last month the Financial Conduct Authority (FCA) released its (long overdue) consultation paper on DB transfer advice. The focus of the paper was to improve the quality of advice offered to consumers. This means a move away from the box-ticking, critical yield-focused world to a more holistic process that is easier for consumers to understand.
The regulator also said it would consult on changing the definition of insistent clients. Such clarity is desperately needed by advisers need given the scale of pro-transfer feeling.
While it remains the case that a positive recommendation to transfer must be in the client’s best interests, the FCA did propose a change to the starting point, suggesting it would replace the ‘assumption that a transfer will be unsuitable’ with ‘for most people retaining safeguarded benefits will likely be in their best interests’.
The change in itself is small, but many national newspapers jumped on the story that the FCA was now becoming supportive of DB transfers. The front page of the Sunday Telegraph ‘Money’ supplement read: ‘City watchdog: "We’ll help you cash in your final salary pension"’.
Wolf at the door
Headlines such as these will only increase consumer interest and make DB transfers seem a conventional retirement decision. Although transfers may be in the interests of some consumers, there is a danger of it being presented as being in the interests of all.
This point was raised by Aberdeen Asset Management’s head of retirement saving Gregg McClymont. With a slight dig at his old political rival, Royal London director of policy Steve Webb, he said it was easy to convince the mass market they should transfer.
‘I’m struck by the justification for transfers often heard, not least from former pensions ministers, that it makes sense for some scheme members to transfer and is therefore a good thing. But the proper question to ask from a public policy point of view is a different one: will the policy increase aggregate welfare?’ he said at the Great Pension Transfer Debate.
‘In encouraging transfers by individuals for whom it might make sense, is policy paving the way for mass transfers out by scheme members for whom it is a much more risky proposition? History tells us that once a door is ajar it becomes much easier to push it wide open.’
The FCA has laid its rules out for improvements in DB transfer advice. With increasing interest, awareness and a sense of entitlement from the public over transfers, advisers may struggle to please both the regulator and the public.