Over the past year or so, we have seen a large number of individuals transferring their defined benefit entitlement to defined contribution arrangements. A recent study found that 55% of defined benefit members who spoke to a financial advisor chose to transfer out in 2016/2017 compared to just 36% during the previous tax year. According to the British Steel Pension Scheme, the number of steelworkers who have transferred their defined benefit pensions has more than doubled over the past year. And savings specialist, Aviva, has announced it is considering a move into the defined benefit transfer advice market due to the increased interest in transferring and the lack of customer understanding of what is actually involved.
A defined benefit to defined contribution transfers basically means an individual giving up their right to a guaranteed income for life, and for some this is seen as quite controversial.
So why are we seeing this significant increase in transfers out of defined benefit to defined contribution arrangements and what are the long term outcomes?
There are many reasons why someone would choose to transfer and give up their guaranteed defined benefit income, including a lack of trust and feeling of uncertainty following recent high profile bad press for defined benefit schemes such as BHS, Tata Steel and Hoover. They may want to take control of their pension investments and feel their money would be better invested elsewhere. Gilt yields and inflation are a key factor when it comes to transfers. Currently gilt yields are at an all-time low and inflation is high resulting in inflated transfer values which will appeal to many and appear to be too good to turn down. People may also be lured into transferring by being able access ‘new’ defined contributions flexibilities such as being able to take all their pension as cash.
Whatever the reason, the more individuals transferring their defined benefit entitlement out of their defined benefit arrangement does spell good news for defined benefit schemes and their remaining members as it ultimately reduces risk and helps improve funding levels.
Stuart Price