Regulation and auto-enrolment are likely to result in transfer volumes increasing in 2017, argues Paul Pettitt.
In 2016, the Origo Options Transfers service completed over £25bn of pensions transfers – the largest annual value that the service has transferred in a calendar year since its launch in late 2008.
This follows £17bn in 2014 and £21bn in 2015. These high values saw the total value of transfers made through Options Transfers break through the £100bn mark.
In terms of volumes, the service has seen an increase of 22% since April 2015.
More than 90 brands, including large third-party administrators, master trusts, providers and platforms, for both contract and trust-based transfers, use the Options Transfers service – making Options data invaluable in measuring industry trends.
In large part, these increases can be attributed to the announcement of the pension freedom legislation in March 2014 and its introduction 13 months later. The legislation has resulted in people becoming more engaged with their pensions.
In turn, this has led to an increase in transfers into pension plans such as SIPPs through which consumers can access their pension funds via drawdown facilities or take advantage of the new rules around death benefits and inheritance tax planning (IHT) opportunities.
Key drivers
We do not see that momentum beginning to slow anytime soon and, as we head further into 2017, there are three key drivers that we believe will see volumes continue to increase:
• The new rules from the regulator ensuring that annuity products offered by product providers internally to pensions customers are now made available on the open market, as part of the Open Market Option process. This may see more movement in the market as people look to obtain better terms.
• We are approaching the three-year anniversary of the second wave of companies going through auto-enrolment. The first phase of the largest employers have reached their three-year mark already and undertaken reviews of their pension arrangements. Now, the second (much larger) wave group’s anniversary is fast approaching.
These smaller, yet still reasonably sized schemes are beginning to review their arrangements and making decisions as to whether a move would give them more cost effective solutions and be more beneficial for their employees. As a result, we are likely to see companies begin to transfer members’ pension pots to new providers.
• In the DB to DC transfers market, there is discussion around allowing members of occupational schemes to transfer part of their accrued DB entitlement into the DC world to take advantage of pension freedoms.
If this is introduced, it could give pension customers the best of both worlds, albeit individual circumstances will dictate any decisions on a case-by-case basis.
Partial transfers
If a pension customer transfers the whole of their DB pension into a DC product, they have a risk management issue to address: how should they generate an income for life – buy an annuity, drawdown or hybrid product?
With a partial transfer, accrued benefits could be retained in the scheme pension to provide an income for life, and the remaining entitlement could be moved to a DC arrangement, to take advantage of more flexible products and other benefits of the pensions freedoms, such as drawdown, as well as IHT planning opportunities that now allow pension funds to be passed down the generations.
Should partial transfers be sanctioned, this could have the greatest impact on the volumes of transfers that take place over the next few years.
These factors will drive increased demand for quality advice from our industry. This can only be delivered using efficient, cost-effective, consumer-centric systems and processes capable of automating advice and transfer processes.
It is imperative that these systems provide a reliable audit trail, case tracking and useful management information so that, in all cases, our industry delivers improved customer outcomes.
Paul Pettitt is managing director of Origo
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