DB transfers and engagement with members - are you taking responsibility?
24 Mar 2017
The number of people cashing out their defined benefit (DB) pension has soared since the introduction of freedom and choice. Roughly twice as many people transferred in the first year alone and momentum is increasing.
Given the magnitude of the decision facing those considering transferring away from a DB scheme, it's a pity the Government's announced Pensions Advice Allowance of £,1500 didn't extend to DB savers.
Schemes have a crucial part to play in how they communicate with members about their retirement options. Transfer value take up rates have increased markedly in schemes that have already started to engage with members; it is likely to rise much higher as more schemes begin to do this.
However, members transferring must do so on an informed basis and with access to quality advice and support it is in their best interests. Whether they stay or they leave, there are huge risks that members could be making poor decisions that could have a life-changing and life-long impact.
Everyone's different. What suits one person will not suit another. Trustees and employers are uniquely placed to help members make better informed decisions reflecting their own specific circumstances or desires.
While for many transferring out of DB will be the wrong option, for some it could make financial sense. They may perhaps be in ill-health or don't have a spouse, or could just have a scheme offering very high transfer values.
For others a transfer might be right on emotional grounds. People might desire flexibility to pay for a holiday of a lifetime, or simply to sleep better at night knowing their retirement investment is in their own name. Those who stick with DB can feel better about that decision if they understood and explored the alternatives.
Access to quality education and advice
We all know that once you transfer out you can't transfer back. So, it's vital the right decisions are made. Members need high quality engagement, education, and, if they really want to fully explore their choices in detail, transfer advice.
Technology can now help deliver high quality engagement and education cost effectively. While cost shouldn't be a barrier to supporting members making one of the biggest financial decisions of their life, putting in place a preferred adviser for a scheme can bring dramatic efficiencies in the advice process, and hence cost savings.
It's not uncommon to pay £5,000 plus for DB transfer advice as a retail customer, yet the average cost for a scheme-appointed adviser is typically more like £1,000. If multiplied by the one million DB members who are likely to explore their options over the coming decade or two, this leads to a potential saving of c£4bn. That seems like a huge incentive for schemes to facilitate the process rather than leaving members to fend for themselves.
The FCA hasn't been blind to the need of helping people make the right choice. It has an operational objective for freedom and choice: customers should be given the right information at the right time to make decisions that are in their best interests. Hear, hear! This is something the Pension Regulator should look to emulate. Although the trust based environment is different, it's hard to argue with the spirit of the FCA's approach.
It's not just DB members that will be taking note of the publicity around transfer values and the potential sums involved - 'scammers' are too. So it's not just about helping people make the right decision - it's also about helping them avoid being duped.
Abdication of responsibility on this by companies and trustees is reckless. They have a moral obligation to do something - if they don't, then who else will protect retirement outcomes?
One recent client experience provides a salutary lesson. The client had a factory with many workers living in the surrounding area. Our team noticed that one street after another was putting in requests for transfer quotations and alerted the company. It turned out that an IFA, not qualified to give DB pension transfer advice, was going door to door encouraging people to take transfers and taking a cut.
This experience is unfortunately all too common. Government figures show that 250 million scam calls are made each year in the UK. That's eight a second. Although the Government is seeking to close this down, history shows that people will find a way round any particular ban.
Fortunately, necessary changes are already under way in many schemes. Increasingly we're seeing trustees and employers educating staff on their options and supporting them to make decisions. This is no more than what people expect.
Our research shows many people expect their scheme to educate them on their options. But further progress is needed. A line in a retirement pack or annual newsletter telling people they have a right to a transfer value really isn't enough to paint the full picture.
All schemes should be laying out clearly all the options available to members. This is not about box ticking. It's about ensuring members don't sleepwalk into retirement with only partial knowledge risking huge regrets 'if only someone had told me'.