Wise men say, only fools rush in
The majority (84%) of defined benefit (DB) savers have not considered switching their pension to a more flexible option, according to analysis by HUB Pension Consulting.
The consultancy looked at data from the Financial Conduct Authority’s (FCA) Financial Lives survey, which surveyed 19,145 respondents in May last year.
It found only 10% have considered switching to a flexible defined contribution (DC) plan, and 6% were not sure. Of the small number who considered a transfer, just one third (36%) have spoken to an adviser about the move.
Additionally, two thirds (69%) of those who had transferred their DB pot to a DC pension in the last four years said they were satisfied with their choice, while 6% were unsatisfied.
HUB senior pension consultant Seb Sherburn said members should be more interested in reviewing different pension options to maximise their outcomes, even if in most cases a transfer is not suitable.
“With such large amounts involved you would expect people to be keen to consider their options, to at least analyse the suitability of sticking with their DB scheme to ensure they are not unknowingly missing out on achieving the best possible outcome for them.”
Sherburn said when considering whether a transfer is the best option, individual members’ needs should be assessed on a “case by case basis”, adding with more schemes offering abridged advice services, more members should “sense check” with them.
Some things are meant to be
The state pension is probably worth (were we able to buy it out) around £220,000. That value has probably fallen from £30o,000 when pension valuations were at their highest,
The state pension still offers the same amount of pension , the same increases. It’s value is precisely the same to someone getting it than it was in 2021 (when valuations were at their peak).
The valuations of DB schemes – for individual transfer purposes have also dropped over the past two years. This makes cash equivalent transfer values look a lot smaller, though the benefit they value is precisely the same.
Hub are being silly;
1. There is no fundamental driver for CETVs to be taken
The 84% of people who have an opportunity to transfer their DB benefit to a DC pot , are like the 100% of people who don’t write in to the DWP for a transfer value for their state pension. There is no point.
For a tiny minority of the population, the prospect of not getting a wage for life from an occupational pension scheme makes sense. These are the outliers who really can get greater happiness from a big pot of money than from the lifetime security of a wage for life.
There is a larger pool of people, who think they can get more happiness from a big fat pot because of its immediate possibilities and these are the people who have been persuaded to take transfer values over the period when they have been at their highest.
What has happened over the past four years is that those who think they can has shrunk to a hardcore of people for whom a defined benefit is just not right. These are within the 10% that the FCA’s financial lives survey suggests have actively considered switching.
2. There is no longer a mass market for DB transfer advice
Those who want out will find it very hard to get their CETV paid to a DC pot. They can no longer get this funded by the pot using contingent charging (no win no fee). They have to pay for advice upfront with no certainty it will lead to a transfer.
They will have to find an adviser who will carry out this work and these are few and far between. The advice on transfers tends to lead to grumpiness and then litigation. PI insurers don’t like the trail of disaster that tends to follow in the wake of transfer advice so not many advisers can get insured to do the work.
If they find an adviser, the answer on whether to transfer is more likely to be “no”. This is partly because CETVs have shrunk by about 30% from their peak (even though this is compensated for in calculations by the fall in the cost of buying the liability). It is a lot harder to recommend the value of a £200,000 transfer when you know it could have been £300,000 two years ago. Many clients whose CETVs were sufficient to make them an attractive long term wealth management client, no longer look so attractive. The economics of transfers have moved and the incentives to advise on them have moved further.
3. DB pensions were, are and always will be – irreplaceable.
There is now a feeling among employers that the best thing they can do with a funded DB pension is to give the assets and liabilities to an insurance company who will pay people annuities.
This is not what people signed up to when they joined the company pension scheme, they believed they’d get the pension that their company’s trustees managed for them.
Most people still see their company pension as just that, something that has been a part of their lives most of their careers, something that links them to previous employers, well after they’ve left. Something that provides a certain future, which along with the state pension is a rock for future aspirations.
You mess with that rock at your peril. People want continuity and certainty and while the passing of a pension from company to insurer is acceptable (just) , the passing of a pension to a DC pot – is not.
Over time, we may find that companies that did not sell off their pension to an insurer retain a scheme that can provide more pension – because of the employer’s support and consequent investment returns.
The employer who keeps the company pension in place may in time become the gold-plated employer of the future.
People hold out out these days , to stay in schemes where the worst that they feel can befall them is to have a pension paid by an insurer and the best by the boss.
And after years of being warned that their benefits could be heading for the PPF, they are now hearing that better pensions could be on the way, because their scheme’s in surplus.
People aren’t silly!
People are happy to be in DB pensions and don’t want Hub or the FCA or anyone else shaking the tree.
Please let’s not fret about DB schemes doing their job.
Let’s celebrate the 90% of people who sit tight and enjoy their pension rather than press for people to question the certainties they are lucky enough to enjoy.