Are more transfers a blessing or curse for schemes?

Since the arrival of freedom and choice in 2015, the dash for cash has continued unabated with defined benefit (DB) to defined contribution (DC) transfers seemingly the new El Dorado for financial advisers and consultants.

According to The Pensions Regulator, there were around 80,000 transfers out of DB schemes in the year ending 31 March 2017 (although it is not known how many of these transfers were to DC schemes as the watchdog does not hold this information).

Meanwhile, a Royal London survey of advisers shows that volumes are expected to grow by 50% this year. Royal London director of policy Sir Steve Webb forecasts that "the 100,000 mark will be exceeded in 2017".

This lemming-like rush to exit final salary schemes is likely to last for 10 to 20 years with the quantum of transfers doubling or tripling over the next six years, fuelled by word of mouth of the huge sums available.

15-year window

Jonathan Camfield, a partner at LCP, which administers 100 schemes with around 80,000 members says: "The vast majority of deferred pensioners will have retired within 10 to 15 years so this is a 15-year window over which most transfer activity will happen.

"The number of transfer quotes we are doing has gone up dramatically. Before freedom and choice, one in 10 people who asked for a transfer quote would transfer. Now it's one in three."

He adds: "The average age of the transferor has gone up from 50 to 55 with an average transfer of £500,000 and 2% or 3% of members transferring each year. He believes: "This could realistically double or triple and still the right people would be transferring out.

Pensions administrator JLT Employee Benefits is processing £750,000 of transfer payments every working hour. This is equivalent to £100m of transfers paid out each month.

JLT Employee Benefits managing director Malcolm Reynolds said: "In the first year of pension freedoms, we did £1.5bn in pension transfers and in the first half of this year the figure is approaching £700m. At least 50% of the demand comes via IFAs."

Barnett Waddingham senior consultant Liam Mayne has a similar experience: "Transfers have doubled since freedom and choice, up from 0.5% of deferreds to 1.0%."

Duncan Watson, managing director of products and services at EQ Paymaster, which administers 70 DB schemes finds: "There has been a huge increase in requests for transfer quotes and information needed. Since 2015 there has been a 40% increase in activity but the figures should be treated with some caution as IFAs make three or four requests for the same client. Word of mouth is an important factor."

Similarly, Hymans Robertson head of member options Ryan Markham says: "Across our client base we have seen a huge increase in the number of members requesting and actually taking transfer values compared to the figures before the pension freedoms were introduced. Indeed recent figures show the number of members requesting transfer values has increased by over 200% while we have seen an increase of over 300% in the number of people actually taking a transfer value."

Aon Hewitt partner Ben Roe adds: "The level of transfer value activity has increased six-fold since 2014. Payments in Q1 2017 were nearly double the amounts seen in Q4 2016 with an increase in transfers for members at older ages and a five times increase in the number of transfers in excess of £500,000."

Record transfer values

The huge demand for transfers is not surprising, given that the transfer value is typically a multiple of 20 to 25 times the size of the annual pension foregone and can be much higher. Despite the rise in interest rates, transfer values remain at near record highs. From the end of September to the end of October 2017 transfer values (as measured by the Xafinity Transfer Value Index) have remained relatively stable, fluctuating between £229,000 and £234,000 but down slightly from the record £237,000 at the end of August. This is the transfer value that would be provided by a DB scheme to a member aged 64 who is currently entitled to a pension of £10,000 each year starting at age 65 (increasing each year in line with inflation). 

Broadstone technical director David Brooks says: "Trustees and employers, previously paternalistic about their members DB benefits, are increasingly relaxed that if people want to transfer and they do so with advice and their eyes open to the risks why should this option not be on the table. This has seen an increase in the number of schemes including details of the option to transfer on newsletters, specific communications and on retirement statements. This has been quite a sea-change."

Brooks thinks DB transfers will increase as "as more employers and trustees come round to the idea that giving members the full range of options is right for them and the scheme. There are also new requirements that will be law in the next 12 to 18 months that will require communications with deferred members to increase. It is possible that if the scheme has the processes to do so including a transfer value quotation on that statement will be a relatively simple and obvious thing to do."

A Willis Towers Watson survey of leading firms of financial advisers combined with its own experience since 2015 showed that of the 32,000 people over 55 in the scope of the research, 16,000 spoke to an IFA of whom approximately 9,000 transferred to access the new pension flexibilities. Members with transfer values over £500,000 were almost twice as likely to transfer out of their DB schemes as those with transfer values under £100,000. 

Chaotic market

Not all is rosy in the garden. The Financial Conduct Authority is currently reviewing the market following concerns of another 1980s pension mis-selling scandal and several IFAs have been suspended from carrying out transfer business.

Camfield says the challenge for the industry is to make sure over that period that the right people transfer.

"At the moment it just feels a little bit chaotic. It is hard for members to get quality independent advice and charges can be very high.

"Some members know their options. Others don't. Some schemes tell members transfer values others don't. There is a mis-match of information and quality advice."

EQ Paymaster's Watson agrees: "Schemes are variable. Some trustees just give the minimum information which needs to be provided by law when the transaction is processed. Others provide a better member experience."

Barnett Waddingham's Mayne echoes this: "Some schemes spend a lot of time revamping their member communications coming up to retirement but others have done nothing at all."

Member communications seem a weak point. A joint Royal London/LCP policy paper found the large majority of schemes contact members for the first time only as they approach their normal pension age (typically 60 or 65); very few write to members well before pension age about their options; growing numbers of schemes are now routinely quoting transfer values in retirement communications but the majority do not do so; while more than 90% of schemes stress the importance of seeking financial advice to members, only 5% provide access to a named financial adviser that has been selected by the trustees or employer; only around 1 in 6 schemes offer a partial DB transfer option; nearly all schemes have an option for deferred pensioners to take early retirement, but the large majority of schemes do not highlight this option to members, and retirement. Communications often arrive too late for members to make full use of early retirement options.

Furthermore, Selectapension national accounts director Peter Bradshaw, who has seen his DB transfer workload more than quadruple from 1962 transfers in June 2015 to 8,336 in August 2017, says: "The unintended consequence of pensions freedoms has been the overwhelming demand for advice on DB transfers, which is far greater than the supply.

"The time taken to facilitate transfers is increasingly frustrating for advisers and their clients.

Derisking

The new pension freedoms can also be very helpful to schemes in de-risking.

Willis Towers Watson head of liability management Stewart Patterson says: "Members transferring out of DB schemes can represent a win-win, by helping members secure more appropriate income in retirement and also removing risk from the DB scheme. Schemes can run ‘bulk early retirement' exercises, which involve writing to deferred members who are able to draw their pension early (i.e. those over age 55). This sees an acceleration of the number of members retiring and/or transferring, and therefore results in the scheme recognising the de-risking impacts sooner. This sort of de-risking exercise can shorten the time it takes a scheme to reach full funding or self-sufficiency, reduce the long-term cost of insuring/securing all the benefits and reduce the headcount of a scheme."

Broadstone's Brooks agrees: "Some employers do see the benefit in running an exercise to contact all members to advise them of the option to transfer and even provide a transfer value quotation." As this would be seen as an incentive exercise, and not business as usual, there can be more work and costs involved. Enhanced transfer exercises are few and far between at the moment as the higher values and pension freedoms providing more than enough of a draw for many members.

But other derisking options are popular. A recent Willis Towers Watson survey found 35% of pensioners offered a pension increase exchange option took it up.

More trickle than flood

While transfers are hitting the headlines, it is right to keep a sense of proportion, there are some five million deferred pensions in some 6,000 schemes so even at 100,000 transfers a year, it would take a while before the £ 1.5trn industry is seriously depleted of members.

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• Topics
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• Defined Benefit
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