Popularity of DB Pensions Prompts New FCA Guidelines
In a previous blog post, I discussed how a sudden spike in the number of defined benefit (DB) pensions transfers was creating a class of ‘lottery winners’ thanks to payouts as much or more than £200,000 or £300,000. Well, as it turns out, there may be even more lottery winners than that.
While a freedom of information request obtained and published by The Pensions Regulator last month indicated that there had been 80,000 DB transfers between 1 April 2016 and 31 March 2017, in a recent letter to the Financial Times, the consultancy firm Mercer estimated that the actual number of transfers was closer to 210,000 and represented £50 billion. In fact, thanks to this tremendous windfall for the country’s pensioners, one in five independent financial advisers (IFAs) say that at least 25% of their total business comes from DB pension transfers.
The FCA has taken note of the popularity of DB pension transfers and their profound impact on the rest of the UK’s investment landscape, and as such, they are now instituting new guidelines for advisers, pensioners, and investors alike.
First, the FCA will change the guidance it offers IFAs and other financial advisers, for it currently recommends that experts begin discussions of DB transfers by presenting them as “unsuitable” options for clients, according to its Handbook of rules and guidance. Whilst this might seem very negative, it is in fact a big improvement on the previous guidance which led advisors to assume that almost any request for a DB transfer should be declined!
Furthermore, the FCA has also proposed an overhaul of how advisers assess the value of DB pensions when offering clients transfer advice. Instead of the current transfer value analysis (TVAS) model, DB transfers will be assessed via appropriate pension transfer analysis (APTA), which may include cashflow modeling to offer clients more specific and holistic advice on the efficacy of a DB pension transfer.
Additionally, while not a change to the DB pension scheme itself, the Tories have abandoned their campaign pledge to end the ‘triple lock’ for pensions. Adopted in 2010, the triple lock is a guarantee that the government will annually increase the value of state pensions by whichever is higher: the rate of inflation, average earnings, or a simple minimum of 2.5%. The survival of the triple lock means pensions will continue to grow at a stronger rate relative to various other investment classes.
In the meantime, what can you do with your DB pension transfer? If you’d like to invest those funds and generate 7-15% average annual returns, then ask for a complimentary copy of my FRESH investments special report—just email email@example.com or call +44 1273 447 299—you’ll be glad you did.