Defined benefit to defined contribution transfers
The Regulator acknowledged that the additional flexibility for people with DC benefits may increase interest from members wishing to transfer from DB to DC pension schemes. They even removed the option for members of unfunded public service schemes (to avoid a mass exit.)
The Regulator recognised two headline risks:
- Members may choose to transfer their benefits when it was not in their best financial interests, and;
- A large volume of transfers could destabilise the DB scheme by crystallising liabilities.
Safeguards were implemented by introducing a legal requirement for all members with benefits of £30,000 or more to get appropriate independent advice, from a Financial Conduct Authority (FCA) authorised adviser to understand the financial implications of the transfer.
It was commonly accepted that transferring DB assets into a DC arrangement was an ill-informed choice. The concept of a member willingly giving up their guaranteed income for life, for a pot that will fluctuate with peaks and troughs in investments seamed inconceivable. Despite this fact, DB to DC transfers are at record levels.
For schemes this is becoming an effective way of de-risking by reducing their liabilities. But what are driving these transfers? Possible reasons can be found below:
- The draw of a large cash lump sum;
- High transfer values resulting largely from the decline in gilt yields;
- Concerns over the solvency of the DB scheme;
- The offering of enhanced transfer values and incentives;
- Members in poor health (the whole pot is tax free for members with a life expectancy of less than 12 months, or tax free on transfer to a spouse if death is before the age of 75.);
- Members with no dependents or spouse can take the whole pot for themselves.
However the risk to financial advisers is significant, and professional indemnity premiums are expected to rise, some advisers are reporting that some customers are insisting on transfers even if the advice is not to do that.
The FCA have taken an interest in this and are asking advisers how they are dealing with these situations, the fees they are charging for transfers and if they are giving advice in this area.
An FCA spokesman is quoted as saying:
“[The data request] is designed to help our understanding on the relative prevalence of risks in relation to insistent customers and also in relation to pension transfers. Whilst we have anecdotal
evidence on these two areas, as well as data from providers, we are supplementing this quantitative data from the advisory market through this request.”
Advisers are calling for guidance and in response the FCA has published a document entitled ‘Pension reforms and insistent clients’ which was last updated in August 2017.
The document can be found on the FCA website by clicking here and gives guidance on steps to take, rules and concerns.
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