The full extent of the amount of money being withdrawn through transfers from defined benefit (DB) pension schemes in the UK, since the pension freedoms came into force two years ago, has been revealed to be £50bn, according to new figures released by professional services company Mercer.
According to Mercer research outlined in a report in The FT, the company, which says that it provides administration for around 7% of the UK’s DB schemes, claims that around 210,000 members have taken a combined £50bn (US$63.3bn) from final salary schemes since pensions freedoms was introduced in 2017.
The figures provide an indication of the full extent of DB cash outlfows and an insight into what has promoted by the UK financial watchdog Financial Conduct Authority (FCA), to move this week, as reported, to consult on changes to DB pension transfers regulations.
The figures in real terms cash outflows will be a concern although the number of outlfows are only slightly higher than those released by the FCA, which said that estimates about 80,000-100,000 advised pension DB transfers are taking place each year.
Deborah Cooper, a partner at Mercer told The FT that the pace of the flow out of schemes has been “dramatic”.
“This is a function of low interest rates making the transfer offers seem big, but it is also a function of the pension freedoms,” she said. Pension freedoms was introduced in April 2015 to give savers over 55 unrestricted access to their defined contribution pension funds, removing the previous requirement to buy an annuity with the majority of the pension cash pot.
As reported, on Wednesday, the FCA published proposals to stem the outflows of DB pensions cash and provide more protection for those considering giving up their DB pension.
Under the new system, all advice provided on pension transfers will be seen by the regulator as a personal recommendation and the current transfer value analysis requirement will be replaced with a comparison showing the value of the benefits being given up.
Overseas pensions transfers
As a result, the already complicated process of transferring pensions overseas will become even harder under the new proposals.
However, a move where it could require expats to consult two sets of advisers one FCA-regulated and based in the UK and one in the country that the expat is living in, has, as reported yesterday been heralded by international cross-border advisory firm Montfort International, as a “fantastic” move by the regulator.
As reported, Geraint Davies, (pictured below left), said that Montfort’s supervisory work indicates that firms will need to take particular care to consider appropriate real rates of return, multiple layers of fees which are not always loaded into product charges and taxation considerations.
“This is our standard practice it is heartening that this is seen as the way ahead, but surely it’s what should have been happening all along,” said Davies. “I think the FCA will need to look at firms who have foots in two jurisdictions to see whether there is evidence of systematic selling.
“We are particularly interested in gaining further insight into the current practices for advice on transferring safeguarded benefits overseas, the impact of our proposal to these types of transfers and any thoughts on how these transfers can be facilitated where it is the right thing for the individual while providing sufficient protection for consumers.”