Defined benefit pension transfers have almost tripled in value.
As record numbers of people transfer out of their defined benefit pension schemes, The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) are taking steps to ease the process for financial advisers.
In 2017, the Office for National Statistics reported that transfers out of pension schemes nearly tripled in value to a record amount of £34.2bn. The proportion of workers has also shrunk significantly, with less than 10% of employees currently part of one of these schemes.
Defined Benefit (DB) pension plans use a formula based on an employee’s earnings history, tenure of service and age to calculate a specified pension payment and/or lump sum on retirement rather than focusing on investment returns. They have been popular with many governmental and public entities as well as some corporations, often as a means of compensating workers in lieu of increased pay.
Many, however, are looking to take advantage of attractive transfer values by moving their money into defined contribution (DC) schemes, which they can access using new pension freedoms. In many cases, transferring out of a DB scheme could leave savers worse off, so ensuring that they get the right financial advice is incredibly important.
Unfortunately, the main issue around DB transfers is communication between advisers and scheme administrators, with different approaches taken by each. Administrators usually offer generic information, while advisers need more specific details to advise on suitability.
Fiona Frobisher, TPR Head of Policy, said: “The big issue is the toing and froing of information between advisers and administrators. That seems to be a complete nightmare.”
The transfer template solution
TPR is responding to industry calls for standard rules by partnering with the FCA to produce a standardised template, the first draft of which is due in autumn 2018. Its aim is to reduce the number of information requests from advisers and the time spent on this part of the process.
This is part of a grander scheme that sees the two bodies collaborating to tackle the risks to the pensions sector. More details of the joint strategy and other measures designed to ensure that people have enough money for their retirement will be available with the template itself. The desire to make good choices for scheme members is critical to this overall strategy, so the focus is not only on the ease of the process but also the quality of the information provided.
The new guidelines reflect feedback given by financial advisers, providers and scheme administrators during a consultation period that closed in June 2018. The template should contain an agreed list of necessary data that advisers deem essential for providing sound advice and that scheme administrators consider deliverable.
The hope for financial advisers is to speed up the gathering of information so that they will be better armed to make assessments and give advice on whether a scheme member should be transferring money at all.