A Freedom of Information (FOI) request from AJ Bell reveals defined benefit (DB) pension transfers surged as transfer values increased post pension freedoms
Average transfer values increased from a low of £258,109 in the six months immediately following pension freedoms, to a high of £389,545 in the year to 30 September 2017
FCA recently responded to this surge in activity by proposing a ban on ‘contingent charging’ models where advisers are only paid if a transfer is completed
Andy Bell, chief executive at AJ Bell said, “The surge not only in pension transfer activity but the proportion of positive recommendations was undoubtedly behind the FCA’s recent proposal to ban contingent charging.
“However, soaring transfer values appear to have been a significant factor in driving DB transfer activity. In the first six months of the pension freedoms, for example, the average transfer value was just over £258,000 and 57% of those who received advice were recommended a transfer.
“In the next 12 months, when the average transfer value jumped to £292,000, 64% of clients who received DB transfer advice received a positive recommendation. And when average transfer values peaked at £390,000, almost three-quarters (72%) of clients received a positive transfer recommendation.
“This makes perfect sense and suggests that the market is functioning better than the FCA thinks. The regulator’s starting position is that a transfer is not in the interests of most people but there are perfectly good reasons why a transfer will be the right outcome. This would particularly have been the case as transfer values soared to record levels and that is reflected in the proportion of recommendations to transfer.
“It must also be remembered that these figures only count people that went through a formal advice process. Many advisers operate a triage process that filters out clients for whom a transfer is very clearly not appropriate. If these clients were included in the data the proportion of recommendations to transfer would be significantly lower.
“Over the last year data is available for we’ve seen the average transfer value decrease and the proportion of recommendations to transfer has naturally followed suit. This trend is likely to have continued as increased regulatory scrutiny has pushed up Professional Indemnity insurance premiums for advisers, causing the advice market for DB transfers to shrink.
“It wouldn’t be a surprise to see the volume of DB transfers to halve for the year to end of September 2019 when the data becomes available.
“Whilst I am sympathetic to the FCA’s concerns, I don’t agree with their default position that pension savers shouldn’t transfer from a defined benefit into a personal pension. One important point that is often ignored is that the scheme actuary of the transferring scheme is obligated to confirm that all transfer values fairly reflect the benefits being foregone, subject to certain underlying assumptions about the scheme membership.
“Advice should therefore focus on two areas. Firstly the value to the customer of the guarantees inherent in a defined benefit scheme compared to the opportunity to invest the pension fund with an aim to beat what is essentially a gilt/bond based investment return assumed in the transfer value calculation, with the added benefit that the investment can be left to someone on death. Secondly to consider whether the pension saver differs from the scheme membership assumptions inherent in the transfer value calculation. For example, if the pension saver is single or in poor health then the transfer value is likely to represent even better value for money.
“Defined benefit pension savers will inevitably find it harder in the future to find an adviser willing to help them in this area.”