Final salary transfer rush set to continue in 2017?
In this blog I look at the growing demand for final salary transfers and suggest a way that sponsoring employers could share the cost of advice to their scheme members to ensure that fewer people fall victim to the many scammers who are out there.
There has been a lot of talk recently about savers rushing to cash in their ‘gold plated’ defined benefit (DB) pensions. A well-known QROPS salesman issued a press release last week suggesting clients should transfer before Section 50 is triggered! And we have even seen Baroness Altmann state publicly that she has transferred two of her DB pensions.
DB transfer enquiries remain extremely high for advisers, and this demand will likely continue in 2017 as schemes look to offload liability and members are attracted by high transfer values and the flexibility presented by the new pension freedoms.
Funding DB schemes is getting more expensive for employers even though many schemes are seeing reducing numbers of active members. Employers who sponsor these schemes are also faced with the costs of auto-enrolment in terms of both contributions and communications. None of the FTSE 100 companies now runs a DB scheme which is open to new members and many have been securing member benefits through insurers to control future costs.
We and other advisers we talk to at industry events and in general conversation are seeing a lot of worried consumers, especially after the shock for BHS members, but it doesn’t mean transferring out is the right thing to do, many will still be better off staying put. Although people might feel their schemes could be at risk, DB transfers are complex and there are a number of factors that need to be considered, which is why people need specialist advice from a regulated adviser. Scheme members need to understand that some of the larger schemes are sitting on funds running into billions of pounds, and most of these are run in a professional manner and with the members’ interests at heart.
Final salary pension transfers are not a black and white process. A DB scheme gives secure and predictable future income for members, their spouses and any dependents, with no investment risk, no management costs and inflation protection. However, a DC (defined contribution) scheme offers complete flexibility with access to a large capital sum if needed, favourable death benefits and the opportunity to buy a higher income if in poor health via an enhanced annuity. There is no one size fits all option, everyone’s retirement needs are different and each case needs to be considered on an individual basis.
Consider the case of a member whose spouse is 9 years older than them versus another member whose spouse is 9 years younger. The scheme does not recognise this difference in spousal age and simply works on the basis of an ‘average’ member. And while we can never predict how long someone will live, the member with the much younger spouse is potentially giving up much more than the member with the older spouse when it comes to a final salary transfer.
A potential move to make it easier for individuals to transfer out, which Sir Steve Webb has recently been speaking about, is fraught with dangers. Without the intervention of specialist advice there is a real danger many will make very poor and inappropriate decisions. We are already seeing evidence of poor decisions being made in the DC market where there is no requirement for advice. In my view we should be looking to increase protection for DC members rather than water down the protections DB members have. In addition, with the growing number of pension scams in the market, making it easier for people to transfer would undoubtedly lead to more people becoming victims of these scams.
The challenge the industry needs to tackle is how to make regulated advice more accessible and more affordable, whether that be for final salary pension transfers or any other aspect of pension and retirement planning.
Employers could and should play a huge part in making advice available to their employees and former employees. An employer, through their scale and resource, could undoubtedly secure more cost effective advice for members of their schemes than the members could do on their own.
If a member transfers they reduce the scheme’s liabilities, so if the advice is that they should do so the outcome can be a win win scenario.
Gone are the days of making the glib statement ‘if you are unsure about anything you should take financial advice’ – people need better support that that if they are to achieve better financial outcomes and that must involve a more proactive approach to advice delivery in the workplace and for former employees.