Defined benefit (DB) transfer activity has “passed the peak point” after the market dropped some 20% in six months, according to the latest data from the Office for National Statistics (ONS).
According to the data, the pension transfer market dropped from £8bn in Q2 2018 to £6.3bn in Q4, representing a drop of 20%.
AJ Bell senior analyst Tom Selby said the findings could suggest we have “passed the peak point” when it comes to pension transfer activity.
Since the launch of the pension freedoms in April 2015, some £92bn has been transferred. Selby said it was tough to overstate the magnitude of such a figure, the vast majority of which was likely to be made up of savers ditching their DB schemes in favour of the flexibility of defined contribution (DC).
He continued: “A number of factors are contributing to the recent slowdown. The Financial Conduct Authority’s increased focus on the market has undoubtedly had an impact, forcing a number of advisers to exit the market.
“Rising insurance costs for advisers is also affecting supply, with a knock-on impact on the volume of transfers taking place. There were also some significant cases – most notably British Steel – that skewed transfer volumes upwards in recent years.”
Selby said the number of transfers will naturally edge lower as the population of members in DB schemes dwindles and, over time, as DB schemes disappear from the retirement landscape, we are likely to reach a point where guaranteed employer-sponsored pensions are practically non-existent in the UK.
DC overtakes DB
Elsewhere, the same data set marked 2018 as the first year employees paid more into DC than DB schemes.
In 2018, employee contributions into DB pensions fell slightly to £3.216bn, while employee contributions to DC rocketed to £4.073bn, overtaking DB for the first time. Comparatively, in 2013, employees paid £3.6bn into DB pensions, but less than £0.5bn into DC.
While employees are now paying more into DC than DB, employers continue to be paying more into DB. Even ignoring any special contributions to address funding shortfalls, employers paid £17.6bn into DB. This compares to £11.621bn into DC into 2018.
Aegon pensions director Steven Cameron said: “The latest figures from ONS show the meteoric rise in DC pensions, fuelled by automatic enrolment and the huge growth in master trusts.
“In 2018 for the first time, employee contributions to DC outstripped those into DB pensions. Employers are still paying more into DB than into DC, although with the continued decline in DB in the private sector and with auto enrolment minimum contributions from employers rising from 2% to 3% from April 2019, we may in 2020 see DC overtake DB for employer contributions too.”