A survey of international financial advisers has highlighted that demand for defined benefit pension transfers is expected to increase by a third on average, due to fears that defined benefit schemes will not be able to meet their long term liabilities
The survey, conducted by part of Old Mutual Wealth-owned Old Mutual International (OMI), highlights the extent to which financial advisers expect defined benefit (DB) pension transfers to increase and that high levels of scheme deficits are fuelling this demand.
The survey shows 42% of financial advisers globally have seen a rise in demand for DB pension transfers in the last 12 months, and 35% expect demand to continue to increase in the next 12 months, Old Mutual International said in a statement announcing the results.
83% increase in UK
UK advisers have experienced the biggest growth in demand, with 83% saying they had seen an increase in demand in the last 12 months (54% saying they had seen a ‘significant increase’ in demand) and 71% expecting demand to increase in the next 12 months.
Advisers were also asked to predict the amount by which this demand will increase in the next 12 months; advisers across all regions expect this demand to increase by an average of a third (33%), the survey found.
67% of advisers say the increase in demand is fuelled by the fear that the DB scheme will not be able to meet its long term liabilities and 66% believe the improved transfer value/ critical yield is a factor. This compares to 58% who say the increase in demand is driven by the pension freedoms.
UK advisers place more emphasis on pension freedoms as the main driver, with 91% saying this was a reason for the increase in demand.
David Denton, head of international technical sales, Old Mutual Wealth, said that UK-based advisers have previously been “fairly cautious” when it came to defined benefit transfers, as decisions were seen as “high risk and irreversible”. However, with the survey highlighting that 71% of UK advisers saying they expect demand to increase, the industry may, he said, be seeing the “tide turning”.
The survey highlighted that high DB scheme deficit of £784bn, and the record low gilt yields are causing concern, combined with the relatively high transfer values. However, despite the concerns OMI point that pension transfers away from DB schemes are “irreversible”, and may not be suitable for all clients.
DWP Green Paper
The recent Department of Work and Pensions Green Paper on the ‘Security and sustainability in defined benefit pension schemes’ may help to reassure some scheme members that the regulator is reviewing this area of activity to ensure the longevity of defined benefit schemes and the protection of its scheme members, OMI said.
Conversely, it said, the paper may also raise some concerns given one option to maintain affordability is for ‘schemes to reduce liabilities, perhaps by reducing benefits, or restructuring exercises’.
“It is important advisers continue to assess each case on its own merits as defined benefit transfers will not be suitable for all clients,” added Denton.
“Following the Election in the UK, with the Conservatives now operating a minority government, pension issues are likely to have slipped down the agenda. There is a risk the response to the Green Paper could be pushed out, but the area of defined benefit pension funding and transfer suitability remains a crucial issue and it is important this remains on track.”