After member interest in transferring out of defined benefit schemes dropped by 50 per cent during the first lockdown, transfer values have recovered and 2021 could even see a “gold rush” in activity.
Figures shared with Pensions Expert by Barnett Waddingham demonstrated how the Covid-inspired turmoil impacted transfer values and activity over the past year, with members requesting transfer value quotes declining by half at the height of the pandemic, and the vast majority of bulk transfer exercises being put on hold.
They also show that uncertainty has impacted cash equivalent transfer values.
A typical CETV for a 60-year-old decreased by 2 per cent over the past quarter, regardless of whether the pension increase was fixed or inflation-linked. This is a significant improvement over the volatility experienced in March and April, where an average 60-year-old could have seen the value of their benefits change by as much as 15 per cent over a two-week period.
Next year may be very different and there is a real risk of a ‘gold rush’ of people looking to access their DB pensions
Bart Huby, LCP
In response to this volatility, pension schemes took a number of steps, not least enacting temporary suspensions of transfer value quotations, as Pensions Expert reported at the time.
However, Barnett Waddingham associate Mark Tinsley said that, following the end of the first lockdown, there were “clear signs that transfer value activity was returning to normal”.
“The number of transfer quotations and payments had… largely recovered to pre-pandemic levels by September, suggesting that members were once again turning their minds to planning for retirement,” he said.
Unemployment and insolvencies could boost transfer interest
New analysis published by LCP on Thursday showed that the second Covid-inspired lockdown led to another dip in transfer quotation requests, but a surge could arrive next year.
LCP’s figures, gleaned from monitoring 80 schemes covering 65,000 members, half of whom could be eligible to transfer out, showed a decline in requests from an average of just below 50 a week at the start of the year to nearer 25 at the height of the first lockdown.
As the government’s anti-viral measures were relaxed over the summer, that volume increased to 37 a week, falling back to 30 a week following the introduction of the second lockdown.
However, LCP partner Bart Huby predicted that the winding up of the government’s various support mechanisms is likely to herald the start of a particularly difficult period, with rising insolvencies putting pressure on household budgets.
This could in turn lead to a spike in interest among people aged over 55 in accessing their accrued rights, with large-scale redundancies boosting demand to access pension pots.
“Interest in a potential pension transfer has been depressed during 2020, especially during the first and second lockdown periods. But 2021 may be very different and there is a real risk of a ‘gold rush’ of people looking to access their DB pensions,” Mr Huby said.
“This makes it all the more important that schemes do what they can to help members access affordable and high-quality transfer advice so that members can make a decision that is right for them.”
Contingent charging ban could reduce transfers
Barnett Waddingham’s next quarterly analysis will present the first opportunity to review the impact of the Financial Conduct Authority’s ban on contingent charging, which could impact the transfer market, Mr Tinsley said.
The FCA announced in June its intent to go ahead with the ban, which it said would remove conflicts of interest that arise from arrangements where a financial adviser only gets paid when a transfer goes ahead.
The ban came into force in October and, although not yet present in the analysis, Mr Tinsley argued that it “could potentially significantly reduce the number of transfers out from DB pension schemes in the future”.
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LCP partner Steve Webb told Pensions Expert that it is probably too soon to tell precisely what the ban’s impact has been, though he cited a recent joint paper between LCP and Royal London that found a large number of advisers were looking to pull out of DB transfers, with many citing tighter rules on charging structures.
“In terms of the impact on members, it may mean that some simply won’t seek advice (because they can’t find the upfront money), but it may also mean that those who do are more likely to insist on transferring — even against advice — because once you’ve forked out £4,000 for example, you aren’t going to take no for an answer,” Sir Steve said.
“We are strongly of the view that there is a role for trustees here in helping members to access affordable, high-quality impartial advice.”
