Huge ‘bow wave’ of DB transfers pushing up scheme costs: ACA

A third of DB schemes are seeing 10 per cent or more of members requesting transfer valuations, creating a ‘huge bow wave’ of admin that is pushing up scheme costs by up to 20 per cent.

Figures from the Association of Consulting Actuaries’ (ACA) second interim report of its Pension Trends Survey shows that, alongside other freedom and choice costs, transfer value activity is adding between 10 and 20 per cent to scheme administration costs over previous years.  The ACA survey also found six out of 10 employers reporting that members are having difficulties in finding advisers prepared to advise on these transfers which may, in part, be contributing to only around 1 in 4 requests being completed.

The ACA survey, which was conducted over the summer and received responses from 466 employers, found 47 of DB schemes say the incidence of transfer requests exceeds 5 per cent of scheme members, with a third of these employers reporting requests exceeding 10 per cent of scheme  members. But completed transfers are at a lower level, with just 16 of schemes reporting completed requests exceeding 5 per cent of scheme members.

Over the last two years, it has been reported that over £50 billion has been withdrawn from defined benefit schemes, with average transfers out of DB schemes now exceeding £250,000.  The ACA says its findings highlight concerns that high transfer values, due to low interest rates, are stimulating member interest in cashing in DB pensions.

ACA chairman Bob Scott says: “There are concerns about both the availability and appropriateness of the regulated advice available to DB scheme members.  Other research suggests that only around half of those who took advice to transfer were properly advised.  Of the other half, one third of recommendations were unsuitable and the remainder were unclear.

“This is disappointing but isn’t surprising.  DB pensions are complex and varied and their value is not well understood.  Comparing a DB pension to uncertain post-transfer investment returns and income choices is fiendishly complex.

“Our survey results confirm the ongoing shortage of IFAs prepared to provide guidance services in this complex area.  However, many schemes are additionally noting to our members that where IFAs are providing advice, the questions they pose during the transfer process are varied and time consuming.  The quantum of enquiries and differences in approaches is posing difficulties for administrators and pushing up administration costs.  Standardisation in the questions asked would seem to be a sensible step and this may be an area where the FCA could act swiftly to help all concerned.”