2017 may be the year of the final salary pension transfer.
IFAC have discovered that defined benefit schemes are now offering better transfers, with lower critical yields than they have for years.
According to the FT some schemes are now paying out 30 to 40 times the annual pension income, which squeezes out a critical yield that obviously comes in at an acceptable level, and some way less than the Beecher’s Brook of 10% per annum required that has made so many transfers in the last decade so hard to justify.
This demand is driven by the compressed low bond yields that makes it expensive for the Final Salary schemes to match their liabilities with equivalent assets - government gilt edged or at least high grade bonds. At the same time pressure from the Pensions Regulator is forcing companies to do more to lower their risk – and buy more bonds. Add to this the new European pension regulation that forces companies to add yet more cost in governance and controls on their pension funds as highlighted by Lane Clarke and you have a cocktail of regulation that could well force more companies to wind up their schemes. The IORP II Directive comes into force this month of January 2017.
There has also been a jump in the number of transfer requests since the EU referendum. According to LCP actuaries, transfer values jumped by 25% in 2016. Despite this only a fraction of consumers actually know the transfer value of their deferred benefits. According to LCP’s research on the schemes they look after, only five per cent of deferred members actually ask for a transfer value each year, and only ten per cent of these convert the information by way of transfer, meaning half of one per cent transfer each year.
Where do these transfers go? Well check this – some 25% go to QROPS based in Gibraltar or Malta, and the remainder go to personal pensions, with one per cent to other final salary schemes.
Pressure will continue to grow over the next couple of years until it becomes standard practice to quote transfer values, not only in retirement packs, but also in annual benefit statements and leaver statements. This would be a big change for most schemes and trigger more transfers, potentially reducing the cash in values offered as it becomes less difficult to persuade members to take their liabilities away from the final salary scheme.
Pensions minister Baroness Ross Altman has transfered two of her own final salary schemes last year. She claimed their value doubled between 204 and 2016. Martin Wolf, the FT chief economic commentator has also recently cashed in his own. Both are married and Ross Altmann has three grown up children. Martin Wolf is reported as saying that to get the full return of his DB transfer value as offered, he would have to live to nearly one hundred AND the pre tax real returns on the investments would have to be zero for decades. "for the latter to be true”, he says “capitalism would truly be dead."
Scandals at TATA British steel, BHS and others accelerate the demand. During the crisis at Tata, the government reportedly wanted the employer to suspend index linking to reduce the deficit. This didn’t happen, but is something to watch carefully. Again, if index linking went, the exit would be rushed, and values offered would reduce.
In our experience only a minority of scheme benefit statements with CETV attached offer sufficient information to enable a transfer decision to be made. This makes the work difficult and expensive for advisers. Furthermore the industry is bound by CETV and critical yield assumptions, when in reality anyone wanting a transfer will not want an annuity. It is a little absurd that government insists on the old fashioned comparisons, although it does enable you to see if the transfer is fairly valued by the ceding scheme. Regardless of our opinion, the FCA still ask all advisers to consider the advice to leave pensions inside the final salary scheme as the default advice option. And they do not require you to be qualified to advise that position.
Only ten percent of IFAs are able to handle PTOO work, and yet this is set to be the biggest thing in the industry in 2017. IFAC offer locum’s for small practices and offer qualified PTOOs on hire to IFAs who wish to increase their permissions to take on this work.