Alastair Black analyses whether the surge in demand for transfer advice has become the norm.
Financial advisers, TVAS providers and scheme administrators are being stretched to the limit by an eye-popping increase in consumer demand for defined benefit (DB) transfer support.
But is this just a temporary phenomenon or a sign that the pension landscape has permanently shifted?
What’s driving demand?
The drivers behind this growth in demand are well documented:
• The attraction of DC pension freedom: The game-changing 2015 reforms allowing over-55s to take what they want, how and when they want it, from modern, flexible DC pensions – and potentially create a tax-efficient legacy for their loved ones – have an obvious appeal that has resonated with the public.
• The demise of private sector DB provision: More than 80% of pre-retirement DB members are no longer accruing any more DB benefits, raising the question in their minds over whether they should stick with what they have got or flip over into the DC world of freedom and choice.
• Current high transfer values offered by DB schemes: We estimate transfer values have typically increased by more than 80% since the end of 2013 on the back of falling gilt yields, improved longevity and scheme investment derisking, dangling the tempting lure of an easy access pot of lucre in place of a “boring” regular, guaranteed income.
Together, these factors have conspired to create a perfect storm among DB members.
Will it last?
Historically low gilt yields have been the primary driver behind higher DB transfer values. There is little consensus on when the current gilts bubble will end or what the “new normal” might be.
General opinion appears to be that “the only way is up”. But few commentators anticipate a return any time soon to the long-term gilt yields of more than 5% that existed before the 2008 financial crash.
We estimate that with a 0.5% change in gilt yields broadly equating to a 10% change in the transfer value on offer to a 55-year-old member of a typical DB scheme, with an even larger impact for younger members, fears of rate rises could drive a short-term buy now mentality. This may fuel a further surge in enquiries about transferring.
High transfer values do not always mean transferring is the right thing to do for the majority, but it is driving demand.
With an average DB pension of just £7,000 a year, the overwhelming majority of people tempted by a high transfer value are likely to stick with DB once they realise the wider implications, and risks, of moving away from a guaranteed income.
This is where an effective triage process is key to filtering out these cases early, before getting into the time and expense of full transfer analysis and advice.
But it is likely to be different for many of the wealthiest DB members, where flexibility to vary income and manage tax may be more important to achieving their goals than a guaranteed income.
If DB transfer values do start to dip over time, a move to flexible DC is still likely to be a more appropriate fit for their needs than DB – and must be seriously considered when weighing-up their options.
Even if only 10% of DB members fall into this category, this still equates to about 600,000 members with an asset share of perhaps £300bn-plus. Which could mean about 30,000 high net worth DB transfers a year, for the next 20 years.
With this prospect in sight, perhaps our industry needs to accept that the world has changed and gear up to support high demand for DB transfer advice from the wealth segment for the foreseeable future.
Alastair Black is head of financial planning propositions at Standard Life
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