Around £50 billion has been paid out of company-backed defined benefit (DB) pensions schemes in the last two years.
The withdrawals follow the implementation of the 'pensions freedom' regime in 2015, which allows over-55s more flexibility over how they use their DB pensions funds. Professional services firm Mercer calculated that 210,000 DB members had cashed out a combined total of around £50bn since the new rules were brought in in April 2015.
Mercer told the Financial Times the transfer of pensions funds out of DB schemes was beginning to reduce pension risk for the UK's 5,800 DB schemes, which have combined liabilities of around £17 trillion.
Mercer extrapolated the figures from the number of transfer value payments it had made on behalf of its administration clients between April 2015 and May 2017. The funds are normally transferred into defined contribution pension schemes.
Pensions expert Robert Tellwright of Pinsent Masons, the law firm behind Out-Law.com, said the surge in transfers out of final salary pension schemes was driven by current economic conditions such as low interest rates.
“Since the government’s 'freedom and choice' reforms in 2015, members transferring their benefits to a defined contribution arrangement will also have greater flexibility about how to apply these funds during their retirement,” Tellwright said.
“This has prompted trustees and employers of final salary schemes to increase member awareness about transfer options – with many now including transfer quotes as standard in members’ retirement packs,” said Tellwright. “From the trustees’ and sponsors’ perspective, these transfers reduce their scheme’s overall liabilities, helping to control the associated financial and mortality risks.”
Tellwright said pensioners withdrawing money from their DB pension funds needed to weigh up the potential consequences of the move.
“It is not necessarily a 'win/win' dynamic. Members who take these kind of transfer options will be foregoing the security and certainty of a final salary pension payable for the rest of their life, in return for the extra flexibility of a defined contribution pot,” Tellwright said. “Whilst this may be the right option for some people, it will not suit everyone. It is therefore essential that trustees and sponsors structure transfer options carefully, communicate the risks clearly, and give members appropriate access to financial advice so that they can make a fully informed decision.”
The Mercer figures follow news last week that the Financial Conduct Authority was consulting on financial advice requirements for transfers, tightening its rules requiring transfer advice to be given as a personal recommendation and changing the methodology behind the calculation used to illustrate to the consumer the value of the benefits being given up.
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