Don’t dismiss a review just because of falling CETV values

One effect of rapidly rising interest rates has been sharp falls in cash equivalent transfer values (CETVs) offered to defined benefit (DB) scheme members considering switching to a more flexible pension.

From their peak at the end of 2021, transfer values have fallen by about 40%. In cash terms, the transfer value of a £10,000 a year pension to a 64-year-old has dipped from around £270,000 to nearer £160,000, according to figures from XPS Pensions Group.

Those are eye-catching figures, but the bigger question is, does CETV size matter?

The truth is that a notionally high transfer value was one factor – but rarely the deciding factor – when it came to advising people whether to transfer their DB benefits.

DB transfers are the pension world’s most sensitive subject. Poor advice in the past by some sections of the advice sector has undermined trust and ratcheted up regulatory scrutiny, prompting many adviser firms to give up their permissions.

With transfer values now more modest, many DB members may stick with what they have through inertia rather than exploring their options. Some may find their own financial adviser isn’t qualified to conduct a full DB review or considers transfers ‘too hot to handle’.

There is a real risk of an advice blind spot developing where that minority of DB scheme members who could benefit from a transfer never check out the possibility. This may be a material missed opportunity, particularly as the development of triage services and abridged advice have cut the costs of DB reviews.

Recent figures from the Financial Conduct Authority reinforce the concerns with only one in 10 DB scheme members with pensions not yet in payment saying they had considered a transfer to a more flexible arrangement, compared to 84% who said they had not.

The same research also found that, of those who had considered a transfer, only about a third had consulted a financial adviser. Of those who had transferred from DB to DC in the last four years, nearly seven in 10 (69%) were satisfied with their choice compared to 6% who said they were dissatisfied.

Our view is that everyone nearing retirement should sense-check their preparations.

It’s taken for granted that people with DC schemes would benefit from a review of their options, to structure their finances to best meet their objectives – their income and spending requirements and inheritance plans. That same logic should apply to DB members.

DB pensions are brilliant in cases where reasonably healthy people need a certain level of secure income which is inflation protected and have no other conflicting financial requirements.

They might not work so well in cases where people are in poor health, or need more flexibility perhaps because they have a need to retire early, access cash lump sums, want to pay off expensive debt, or maximise wealth left to loved ones.

The government considered banning transfers when it introduced pension ‘freedom and choice’ in 2015 but decided it was important to give as many people as possible pension flexibility, albeit with safeguards in the form of the advice requirement on DB transfers valued at more than £30,000.

Falling CETVs are not the whole story. Annuity rates have risen just as sharply as CETVs have fallen, opening up new opportunities, as has the government’s decision to abolish the lifetime allowance.

Many DB members won’t be in a position to make an informed judgement on their own. They need support that encourages them to fully consider their options.

High quality advice should focus on the customer and what they want to achieve, not be driven by the size of a CETV. Our experience is that advice can help them reach more of their retirement objectives, whether or not that advice includes a recommendation to transfer.

Seb Sherburn is a senior pension consultant at HUB Pension Consulting