DB-DC transfer requests will rise. Here is how to handle them

That is, those who did not value their DB benefits because they had short life expectancy or were likely to be single when they died. This was the base from which all advisers started when considering such a request. 

However, following the March 2014 Budget allowing greater flexibility for defined contribution schemes from April 2015, DB-DC transfers are set to increase – and indeed we are already seeing a marked rise in requests. 

The Treasury's ‘Freedom and choice in pensions’ confirmed DB-DC transfers should continue – except from unfunded public sector schemes – so long as certain requirements were met, including the provision of independent financial advice for those with funds in excess of £30,000, albeit paid for by the member themselves, unless the employer wished to settle the charge.

Critical yield

In the past, employers who wanted to reduce deficits would have enhanced members’ transfer values to ensure any DB member wishing to transfer to a DC scheme had a better chance of passing the ‘critical yield’ test – ie the minimum investment return needed under a DC arrangement to produce the DB pension being surrendered.

Greater flexibility means DC members can now take their benefits in stages rather than being forced to take an annuity, meaning the critical yield hurdle has decreased as more of the members’ funds can remain in growth assets for longer.

As a result, more individuals have received a green light from their IFA to transfer.

In our experience, where schemes are underfunded trustees are doing one or more of the following:

• Working with their actuary to potentially reduce transfer values;
• Reviewing transfer factors; or
• Pushing payment dates back to allow sufficient time to disinvest funds efficiently in periods of increased demand. Those that are slow off the mark are setting themselves up to fail as demand increases. 

The revisions to the tax treatment following the death of DC scheme members is another contributing factor that will drive up the number of transfer requests from DB members.

Requests from deferred members continue to increase as they seek out flexibilities not allowable under current DB regulations.

The resultant savings in tax payable on the benefits at death also mean that DC pension provision is now being used as an inheritance tax planning tool, attractive to most if not all individuals. 

Despite the overriding right that a member outside of 12 months before their normal retirement age can take a transfer value, we are seeing rule changes to allow transfers at any age.

We are also seeing trustees and administration teams gear themselves up to provide calculations quicker, while ensuring they cope with any potential scams within their administration procedures.

The increase in potential scam cases is an unfortunate side effect of this greater flexibility as more individuals contemplate a transfer, but with a well thought through administration process the likelihood of a member losing out will not have increased. 

Members will continue to be attracted to the course of action they and their adviser believe suits them best in their particular circumstances.

This may come at the expense of a large reduction in their potential long-term guaranteed retirement income in favour of a larger lump sum at outset. 

Given the pensions industry is well regulated and the transfer process is part of an administrator’s everyday life, we do not expect an increase in the number of DB-DC transfer requests to present a problem – this is, in effect, much ado about nothing and we fully support this more relaxed stance.

David Deidun is a partner at Quantum Advisory