24th June 2014
A proposed government ban on transfers from defined benefit pension schemes to defined contribution plans is unnecessary because the economic impact will be very limited, pension provider Standard Life is arguing.
The government looks set to ban transfers from defined benefit pension schemes (also known as final salary and career average schemes) to more flexible defined contribution arrangements. By transferring, scheme members can take their benefits much more flexibly at present usually through an income drawdown arrangement.
But the government is worried that with the proposed annuity and retirement income reforms, there could be a mass exodus from final salary schemes undermining the schemes and, ultimately, the gilt market and the economy.
But Standard Life argues that this is not the case. It believes that allowing people who take financial advice to transfer from funded private sector defined benefit (DB) to defined contribution (DC) pension schemes as they approach retirement will not cause adverse economic ramifications.
The firm argues that if the financial watchdog, the Financial Conduct Authority (FCA) puts in place a requirement that all those transferring must seek full regulated financial advice, then only a small number will transfer, because it will be inappropriate for the majority to do so.
The firm says that for the vast majority of pension savers, a transfer isn’t appropriate. Any risks associated with transfer would be mitigated if the FCA were to mandate that all savers receive professional advice on any proposed move from DB to DC at age 55 or over.
Standard Life also say that concerns that a significant increase in volumes of DB to DC transfers could adversely affect financial markets by reducing demand for government gilts or corporate debt are arguably unfounded.
Standard Life believes less than 0.2% of pension assets are likely to be impacted. It says: “The majority of scheme members transferring from DB to DC will likely require a low volatility, risk-based investment in assets such as gilts or corporate debt in order to ensure a sustainable retirement income. While the nature of the demand may shift to shorter-dated bonds, the scale of demand will not change significantly”.
Alastair Black, head of customer income solutions at Standard Life, adds: “We understand the Government’s concern about the economic and market impact of allowing people to transfer out of their DB schemes to access the new flexibility. We do not anticipate a wholesale demand swing away from bonds as a result of continuing to allow advised DB to DC transfers in later life. A small percentage of bond holdings may be sold, but we estimate the level of risk is less than 0.2%.
“In some cases, given DC pensions could provide a better outcome for some savers, introducing a blanket ban on transfers would seem to be at odds with the ethos of freedom and choice at the heart of the Government’s package of reforms.”
Standard Life’s analysis is below
Gilts and fixed interest (including index-linked gilts) holdings in DB schemes represent around 45% of assets. These are likely to be weighted heavily towards pensions in payment – members already taking retirement income from the scheme. Deducting the 29% liabilities for pensioners from the 45% invested in fixed interest holdings reduces the exposure of fixed interest assets to 16%. Assuming an even distribution, omitting active members and assuming a worst-case scenario of all over-55s transferring out shrinks the exposure to as low as 2% of these assets. In reality, Standard Life believes less than 0.2% of assets are likely to be impacted.