Advisers warned of risks as DB pensions scheme transfers rise

Pension fund members are increasingly transferring their defined benefit (DB) pensions to other arrangements due to worries that underfunding could reduce their benefits.

Financial advisers across Europe said they were seeing a growing level of DB pension transfers and expected the trend to increase.

DB plans guarantee a minimum level of benefit and Old Mutual International, which conducted a survey of advisers in Europe and elsewhere, warned that DB transfers were not suitable for all clients.

The firm’s survey showed that 42% of financial advisers had seen a rise in demand for DB pension transfers in the last 12 months, and 35% expected demand to continue to increase in the next 12 months.

UK advisers had seen the biggest growth in demand, with 54% of them describing it as a “significant increase” and nearly three-quarters expecting it to continue.

Advisers across all regions including the Middle East and Asia, expected demand to increase by an average of a third.

Most advisers (67%) said the increase in demand was fuelled by the fear that the DB scheme their clients belonged to would not be able to meet long-term liabilities.

In the UK, the DB scheme deficit stands at £784 billion (€1.136 trillion) according to the Pension Protection Fund. Old Mutual said along with record low gilt yields, this was “understandably causing concern”.

Relatively high transfer values were also a factor and in the UK the biggest driver was less about underfunding, and more to do with the “pension freedoms” rule changes which in recent years have liberalised what people can do with their pension pots.

Old Mutual said financial advisers “must ensure each case is carefully considered before carrying out a transfer and that they have the appropriate permission from their regulator to conduct such transfers”.

Pension transfers away from DB schemes are irreversible, and may not be suitable for all clients, the firm added.

David Denton, head of international technical sales at Old Mutual Wealth, said: “UK based advisers have previously been fairly cautious when it came to defined benefit transfers, as decisions were seen as high risk and irreversible.

“With 71% of UK advisers saying they expect demand to increase, we may be seeing the tide turning, with more advisers prepared to take on such cases.  It is important advisers continue to assess each case on its own merits as defined benefit transfers will not be suitable for all clients.”

Denton noted that a recent UK government green paper called ‘Security and sustainability in defined benefit pension schemes’ may reassure some UK scheme members that the pensions regulator was looking to ensure the longevity of DB schemes.

However, he added that the paper could raise concerns given that one option for DB schemes to maintain affordability was to potentially reduce benefits.

Old Mutual International’s adviser survey had 210 respondents from across the UK, Europe, Middle East and Asia.

©2017 funds europe

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