Two years on from pension freedoms, trustees and employers need to do more to safeguard over £100bn of defined benefit (DB) pensions at risk from poor decisions and scams.

 Key points from our research:

• Up to £28bn of IFA costs could be saved across UK DB (or £4000 per individual¹) if schemes facilitated the advice process for DB transfers, rather than leaving individuals to fend for themselves.

• The numbers requesting a quote to transfer out of DB over the past 6 months is 170% higher than pre ‘pension freedoms’ levels²;

• The rate of people actually transferring out is up 185% compared to pre-April 2015;

• 250m scam calls are made each year in the UK³ and around £1trillion of DB of liabilities are at risk;

• Easily as many as 10% of DB pensioners could be sleepwalking into making the wrong decisions⁴ – from falling victim to a scam to cash in their DB pension or simply staying in a DB pension when a transfer would have been better.

• That puts £100bn of DB benefits at risk of poor outcomes.  This figure could be far higher unless action is taken by trustees and sponsors.

The number of people cashing in ‘gold plated’ final salary (also known as DB) pensions has soared since freedom and choice was introduced two years ago, according to figures from Hymans Robertson, the leading pensions and benefits consultancy. Twice as many transferred in the first year alone and momentum is increasing. In the past 6 months the numbers requesting quotations from administrators to transfer out have increased by 170% when compared to pre-April 2015 levels. The numbers actually making a transfer are up by 185%. This trend has been widely reported by other participants in the market. 

Calum Cooper, Head of Trustee Consulting commented:

“Record high transfer values have made DB transfers more attractive - both to members of final salary schemes, but also to scammers. Whether an individual decides to stay or leave their DB scheme, there are huge risks members could make poor decisions with a life-changing and life-long impact.

“Trustees and employers have a moral duty to protect members of DB schemes. They work hard to safeguard the valuable benefits promised to them up to the point of retirement. Ensuring individuals make the right choice when making one of the biggest financial decisions of their life is a natural extension of their duties. Members staying or transferring must do so on an informed basis and with access to quality advice. Moreover, if scheme members are unsupported and make the wrong choices this could come back to bite trustees and employers, particularly as evidence supports most expect support with the complex 'at retirement' decisions they now have to make⁵.

“The Regulator is increasingly taking a hard line on ‘insufficient information’ being given to individuals on their retirement options. We recently saw headlines highlighting how tens of thousands of pensioners who were sold the wrong type of annuity are to receive compensation. The FCA concluded these individuals hadn’t had sufficient information about enhanced annuities. It’s not hard to imagine parallels in the DB world.

“The sums at risk from individuals making poor decisions are vast. In total around £1tn of DB of liabilities are at risk. If 10% of those in DB schemes make poor decisions, that’s £100bn of DB benefits at risk of poor outcomes. The actual figure could be higher. We need to put in place the necessary support to help keep people stay financially safe.”

Discussing what trustees and employers could do to support individual scheme members, Calum added:

“As well as putting in place effective communication strategies providing individuals with the right information at the right time, one of the easiest courses of action available to trustees is to facilitate the advice process. This can bring dramatic cost savings, not least for individuals, who could save over £4000 in advisory fees. Retail customers on average tend to pay in the region of £5,000 plus for DB transfer advice, yet the average cost for a scheme-appointed adviser is more like £1,000. Multiplied by the 7 million DB members yet to retire and explore their options over the next 10-20 years, this leads to a potential saving of c£28bn across UK DB.

“Importantly, facilitating the process and undertaking market testing also ensures members have access to quality advice and therefore make decisions on an informed basis.

“One of the biggest barriers to individuals engaging in their options is both the effort of finding an adviser as well as the high costs. If schemes put in place the support, not only would this give trustees and sponsors confidence that individuals are making the right choices in a safe environment, it would reduce scam and 'you didn't tell me' risks.

Explaining why there is no ‘one size fits all’ option for members of DB schemes, he added:

“When an individual transfers, they give up the security of a guaranteed income for life which is usually index-linked. They then take control over the investment and drawdown of their capital. While this could be the wrong option for many, for some it could make financial sense if they are in ill-health or don't have a spouse, or could just have a scheme offering very high transfer values. 

“For others a transfer might be right on emotional grounds. People might desire flexibility to pay off debt, or simply to sleep better at night knowing their retirement investment is in their own name.

“It is not just about those transferring - those who stick with DB having taken financial advice can feel better about that decision if they have understood and explored the alternatives.

“Everyone's different. What suits one person will not suit another. Trustees and employers are uniquely placed to help members make better informed decisions reflecting their own specific circumstances or desires.

“Added to that there are so many different options available to scheme members to access their DB benefits. It’s vital that schemes help members understand all the options available to them, but to do so in a way that’s sustainable and cost effective for all involved.”

^{1 There are 7m active and deferred pensioners with DB benefits, with savings of up to £4,000 per individual. Across UK DB this equates to up to £28bn of savings.
2 According to Hymans Robertson’s Third Party Administration business
3 According to the Chancellor in the 2016 Autumn Statement
4 Xafnity found signs of potential scam activity in 11% of pension transfer requests, May 2016
5 According to Hymans Robertson research among 100 HR Directors at large UK employers, April 2015}