Following the recent announcement by the Pensions Regulator (tPR) that nearly 400,000 people in the UK have chosen to transfer out of their defined benefit (DB) pension schemes since 2016, a leading actuary has warned that, although he can see the positives of such a move, some could be at risk of running out of money.
The Pensions Regulator’s report revealed that 390,000 people have transferred out with the total amount to date standing at £60billion pounds. 210,000 people (£34bn) have transferred out within the last year alone.
Stuart Price, Partner and Actuary at Quantum Advisory, said: “A defined benefit scheme is seen as the gold standard for UK pension provision as it provides a ‘guaranteed’ income throughout retirement for the individual and their financial dependents, so it might seem somewhat surprising that so many people are giving this up and opening themselves up to the possibility of running out of money. However, there are many reasons why transferring out can seem like a good option, particularly following high profile cases of major companies going into administration resulting in members’ DB pension benefits being reduced. Stories like this can make the general public wary of DB schemes and tempt people to ‘take their money and run’.
DB pensions also offer very limited flexibility at retirement and upon death compared to defined contribution (DC) arrangements and, by transferring out from DB to DC, although the promise of the secured income is lost, much more flexibility becomes available. Whether transferring is the right thing for an individual to do depends entirely on their circumstances so unless you look at each case in isolation it’s impossible to say there is a right or wrong option.
It’s important to remember that if a defined benefit transfer value exceeds £30,000, many of which do, then it is a legal requirement for an individual to take independent financial advice so that the individual can make an informed decision.
For the Scheme and the Sponsoring employer, transfers out are generally seen as positive as it helps to reduce liability and overall long-term investment and mortality risk within the Scheme and some employers even offer enhanced transfer values to increase the number of individuals transferring out of their scheme.
I expect given the current low gilt yield, which inflates the value of DB transfers, this year will be another bumper year for transfers out from DB schemes.”
Stuart Price, Partner and Actuary