Emerging data shows there is a downturn in the defined benefit (DB) pension transfer market. This is primarily being attributed to a significant decrease in the number of transfer advisers and a drop in DB transfer values.
As it stands, a member of a DB pension scheme has the right in certain circumstances to ask the scheme for a cash equivalent transfer value (CETV),[1] being a cash lump sum in exchange for their DB rights.[2] The Financial Conduct Authority (FCA) requires the member to get advice from a regulated financial adviser if the value of their DB scheme is more than £30,000. This was introduced in 2015 with the purpose of ensuring members with pensions of more than £30,000 are informed of the implications of giving up their benefits. It also acts as a safeguard against pension transfer scams, with pensions often being targeted as they can be an individual’s largest financial asset. This is something of which trustees and members need to be particularly vigilant. To read more about pension scams and how to best avoid them, read our previous article here.
We understand that a freedom of information (FOI) request by Lane Clark & Peacock (LCP)to the FCA has highlighted that, in the last four years, the number of specialist advisers has plummeted. In May 2023, there were 1,048 firms holding the relevant permissions, in contrast to there being around 3,000 just four years ago. This means it is much for difficult for DB members to find a financial adviser.
This difficulty may explain why data from LCP shows that only 6% of quotations issued in the last quarter of 2022 were subsequently requested by members to be paid out. It is estimated that the 6% take-up rate is about one-third of the rate LCP saw over the previous five years to 2022.
A further reason behind this decline can be attributed to falling transfer values. A typical member aged 55 with a pension of £10,000 per annum payable from 65 had a transfer value of around £250,000 at the beginning of 2022, but that has now fallen to around £130,000. This decrease reflects the higher gilt yield – a key factor in determining DB pension transfer values. This is because higher gilt yields reduce the value of liabilities of a scheme, thereby improving its solvency. This improves the funding position of DB schemes as it means a higher return is anticipated on a pension scheme’s assets and a lower sum of money is needed now by a scheme to pay a member’s pension when it comes. As a lower fund value is needed to buy a set level of income, it in turn reduces the transfer out value.
This downturn in the DB pension transfer market ultimately means that some members may not be getting the best deal in their retirement and, given the potential for irreversible decisions to be made that could affect their retirement, it is more crucial than ever for members to have access to high-quality support and advice.
[1] This statutory right is provided by Chapter 1 of Part 4ZA of the Pension Schemes Act 1993 and related regulations.
[2] The statutory right to a CETV overrides a scheme’s rules. However, if under a member’s scheme rules, they have been granted a separate right to transfer that is more generous than the statutory provisions, then this is permitted.
