A lot has been written of late about the volume of transfers from DB schemes. Such luminaries as Dr Ros Altmann (ex Pensions minister), Merryn Somerset-Webb (Editor-in-Chief, Money Week) and Martin Wolf (Financial Times) have been tempted by corpulent quotations that ballooned following the collapse in gilt yields post the vote for Brexit.
From the sensational press coverage one might think that the transfer market will dry up markedly when and if interest rates rise back to the new normal (from the new abnormal!).
But that view ignores the swathe of non-arithmetic reasons which members with deferred benefits should be thinking about, and which increasingly they are doing. For example:
- The high profile collapse of BHS (and near collapse of Tata Steel) reminded us just how fragile a sponsor covenant can be. The effect of insolvency on an individual’s benefits can be dramatic, especially if that individual was a high earner. In this uncertain world, many will want to swap the idiosyncratic risk of a single sponsor for the market risk of investing through a DC scheme.
- A change to personal circumstances such as divorce, or the coming of age of children, can diminish the value of defined benefit guarantees.
- The introduction of new options relating to pension flexibilities from 6 April 2015 has made personal pensions a useful tool in the inheritance tax planning box.
- Freedom to shape retirement income from DC pots has made the traditional DB income stream look out of date. V shaped or U shaped annuities that maximise income when it is needed (i.e. in the care-free days immediately after retirement and the care-home days as twilight approaches) are on the way.
- Are partial transfer values available from a DB scheme? If so, they can be a good way for members and sponsors to hedge their respective bets.
Of course, deciding to take a transfer is not the end of the matter. Individuals must then choose how to invest and manage what these days can be a very substantial asset indeed. Paternalistic sponsors will want to ease that burden with leading edge pension management solutions. Our next blog will consider how Quantum itself has approached this for its own employees, with the launch of the new trust based DC scheme, QTrust.
Our View: it’s okay to embrace DC, and not just because transfer values look too good to be true. But to do that requires a well-designed pension repository. A trust based scheme is very likely to provide that; see our next blog for more details.