Friday, 15 December 2017

    DB to DC transfers: Are we asking the right questions?

    Why the industry can expect a “tsunami” of enquiries from members about DB to DC transfers

    DB to DC transfers: Are we asking the right questions?

    With weeks to go before the new pension legislation goes live, the Pensions Regulator has helpfully kicked off a consultation process on defined benefit (DB) to defined contribution (DC) transfers.

    Although the industry is largely comfortable with the potential legislation, we have to ask whether the regulator and the industry are asking the right questions.

    How will the volume of transfers impact funding levels?

    Transfer out queries are growing, but not yet spiking. These are across the board and not necessarily specific to schemes or value of pension.

    However, when evaluated by value of estimated cash equivalent transfer value (CETV), even a proportionate number of queries from high net worth individuals could impact funding levels and liquidity of schemes quite quickly.

    “Transfer out queries are growing, but not yet spiking”

    Trustees should be as concerned, or more, about these small number of individuals than a flurry of enquiries from members with a CETV of less than £30,000.

    The IFA market appears to be gearing up to target high net worth individuals. They are more likely to have substantial CETVs, complex financial arrangements and other investments that need managing. They are also more likely to believe that they will be able to manage their money more effectively than their pension schemes.

    The industry should be asking themselves what data they have on the number of members who are close to retirement, the transfer value of their pension arrangements and where these transfers are going. They should also be exploring the ability to delay payments, identify assets that can be disinvested quickly and their options in terms of reduction of transfer values.

    Will there be wall-to-wall kerbside Lamborghinis?

    The Pensions Regulator has deemed it necessary for members to take advice from an IFA where the initial cash equivalent transfer value of the DB benefit they wish to transfer is over £30,000.

    This could mean retirees buying Lamborghini body kits from eBay for £7,500 or perhaps going on a cruise. However, anything more serious than that would have checks and balances in place in the form of an IFA certificate following a review of their circumstances.

    On the other hand, according to a recent research report from the Prudential, of those planning to retire in 2014, women owe £20,700 on average, while men will retire with an average debt of £28,400. Being able to cash a small DB arrangement may be valuable to these retirees, especially if they have further savings elsewhere.

    The questions we therefore need to ask ourselves is, would it be better value for a pensioner to receive an estimated guaranteed £100 pension a month for the rest of their lives, or to pay off their loans, build an extension, buy a Ford Focus for a grandchild or go on several holidays?

    Can we trust these members to make this decision themselves?

    Will the market have sufficient IFAs?

    The IFA market is definitely gearing up to target high net worth individuals and are concerned about capacity constraints. However, most of them would probably already have a trusted financial advisor.

    It will be interesting to see how the market pans out over the next few years in terms of who actually wins this business. However, at worst, the new regulations will hopefully give IFAs with ongoing relationships a new lease of life after the hammer blow they received due to RDR. The recent FCA consultation on the need for ‘Pension Transfer Specialists’, will be interesting to watch.

    The bigger concern is the middle market of potential retirees (with CETVs of over £30,000) as they will need IFA support to release their DB savings. However, many IFAs are cautious about these members as they see them as a risky and less lucrative market.

    This may leave members open to a variety of scams and questionable firms. We have come across at least one ‘Personal Injury claims’ company who is diversifying into the ‘pensions transfer’ world.

    We need to ask ourselves whether we will have sufficient IFAs with the appropriate FCA certification who are willing to work with our average member. Trustees would be well advised to ask themselves what support they will be giving their members in terms of information on the dangers of CETV release and potentially a panel of ‘preferred’ IFAs.

    Are administrators ready for the Transfer Out spike?

    Buck at Xerox is currently running the numbers on potential transfer out volumes to ensure that we have capacity to meet client, member and regulatory requirements. However, we are less concerned about the actual volume of members transferring out and more worried about the volume of quote requests.

    We expect a tsunami of requests for CETV quotations across schemes and members with different pot sizes, purely on a ‘like-to-know’ basis from pension tourists.

    A percentage of these enquiries could be forward planning. Many members may just be curious about their position based on press coverage of the ability to transfer their arrangements to more flexible vehicles.

    “We expect a tsunami of requests for CETV quotations”

    On the one hand we are receiving enquiries from many members who are unclear about whether their pensions are DB or DC. On the other, we also have queries that target specific benefits, such as their AVCs, leaving their DB pensions intact.

    Since larger CETVs would be calculated or at least peer reviewed by actuaries, this could mean a run on actuarial time and delays in reverting to members. Any which way, schemes can expect higher transaction costs.

    The question we should therefore be asking is whether we have planned for the extra actuarial and administration resource and cost for these CETV quotations and whether this will indeed be a spike or the new normal, increasing costs for schemes and administrators alike.

    Regardless of the questions we ask ourselves, we believe that the changes are positive for members and therefore the industry. We just need to be sure that we have the right answers in time for April.

    Can we please stop changing the questions?

    Girish Menezes is a principle at advisory firm Buck Consultants at Xerox.

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