Since the pension freedoms of April 2015 there has been a significant increase in the number of individuals actively considering a DB pension transfer but what are the key drivers behind this increase? What are the key factors that may influence a decision to transfer out of a DB (defined Benefit) pension (or not)?
In our opinion five key factors are in play, they are:
- Awareness of the potential transfer opportunity.
- The health of the pension scheme.
- Pension transfer values.
- Personal circumstances and attitude to risk.
- Perception of the transfer process.
Awareness of The DB Transfer Opportunity
Many DB pension holders are unaware of the option to transfer. Those showing an interest in DB transfers to date are (in our opinion) mainly members of schemes with some issue such as a deficit or a struggling sponsoring employer.
In their ongoing communication with members, Trustees are currently under no obligation to automatically issue pension transfer valuations. However, they are under an obligation to advise pension scheme members of any major changes affecting their scheme.
With pension transfer values increasing Trustees are aware the transfer option is increasingly becoming a viable option for some. As Trustees they have a duty to keep members informed. It is, therefore, possible more DB pension schemes will routinely provide transfer values in their communications in future increasing awareness of the transfer option.
DB Pension Scheme Deficits
The BHS pension scheme falling into the PPF (Pension Protection Fund) and increasing media coverage of the ongoing British Steel Pension scheme saga has brought the issue of defined benefit pension deficits into sharp focus. DB pension benefits are only guaranteed to be paid by the sponsoring employer if they survive to the point the pension is payable, otherwise the scheme would enter the PPF
Many factors (both political and economic) have driven a high proportion of Defined Benefit Pension schemes into deficit. The Pension Protection Fund (PPF) lifeboat is in place but rather than risk a cut in retirement benefits some are considering the transfer option as an alternative.
The background to the British Steel Pension situation is perhaps unique but with the current scheme headed for the PPF, there is evidence over 7,000 deferred members of the scheme (from a total of approximately 40,000 deferred members) have already requested transfer valuations.
DB Pension Transfer Values
The same factors forcing high DB pension deficits have driven DB pension transfer valuations to an all time high on many schemes. For those aware of the pension transfer route, high transfer values can make a transfer worth considering. Of course, transferring to a defined contribution scheme will mean that the fund is subject to investment performance and volatility therefore, unlike a DB scheme, the income in retirement is not guaranteed.
As an example let’s consider a DB pension scheme offering a member a pension of £15,000 per annum. Pre 2015 the transfer valuations offered by many schemes may have been approximately fifteen to twenty times the annual pension ( in the range £225,000 to £300,000). The same scheme may now offer a transfer valuation in excess of forty times (£600,000+)
Circumstances and Attitude To Risk
An individual’s personal circumstances can (and should) have a major impact on any decision to transfer (or not). Even if after an appropriate assessment the figures show a transfer may be the best way forward a risk averse individual should probably not proceed.
Some may worry constantly about normal stock market movements. Others may not wish to take an active interest in their pension fund investments. Changing economic and political factors may be a concern and the certainty of a guaranteed set monthly income may, therefore, be attractive. If so a transfer is unlikely to be the best option for them.
For others, the pension income flexibility offered by a transfer and the opportunity to pass any remaining pension fund on to beneficiaries may outweigh the risks. In some cases, individuals may believe taking control of their pension is a better option than staying with a scheme at risk of falling into the PPF.
Perception of The DB Pension Transfer Process
The impact of media reporting and peer influence should not be underestimated. Negative media reporting (see below) is likely to drive individuals away from considering a transfer. Of course, the opposite is also true and emotional drivers of action can be powerful, regardless of what the advice may be.
If someone in an individual’s network has successfully performed a transfer it is much more likely they will also seek to transfer. However, everyone’s personal and financial situation is different and what is right for one individual is not necessarily right for his friends colleagues or neighbours. it is important for each individual to carefully consider all the options and take appropriate advice.
Although many treat what appears online (particularly social media) with caution mainstream newspapers and news programmes still tend to be believed and their reporting can be a powerful influence.
Unfortunately reporting on the British Steel pension situation has exposed a significant decline in quality journalism in recent years. There is a high level of hysteria and reporting from a single perspective even from what may be as perceived high quality news organisations. It can be increasingly difficult to find a balanced point of view.
Unbalanced reporting from the media tends only to spread confusion and doubt. Based on poor quality information individuals tend to either do something that is not in their best interests or miss out on a significant opportunity. A DB pension transfer is certainly not the right move for everyone but it is for some.
This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.