There’s no let-up in the coverage being given by the UK media to the difficulties facing employers sponsoring defined benefits (final salary) pension schemes.
Driven by persistent highlighting of the deficits faced by many such schemes, the number of scheme members requesting to transfer out their pension savings and move these into personal pensions of one kind or another has risen sharply.
Of 182 employers canvassed recently by the Association of Consulting Actuaries, around 50 percent had received requests from at least 5% of their members to transfer out of their defined benefit schemes.
Pension transfer rush led by higher earners
Upwards of £5bn is now estimated to have been transferred out since 2015, with average transfer values reported to be in excess of £250,000.
“What this suggests”, says UK-specialist Private Client Adviser here at PWS, Stacey Arcus, “is that it’s more comfortably-off employees, often later career employees and so very often employees who have moved on through one or more further employers since joining those schemes, who are transferring.”
In some ways, of course, the problem is compounding itself for scheme-sponsoring employers. With transfer out values still riding high, and growing numbers of higher pension value members leaving their schemes, employers can find themselves left with significantly reduced scheme funds with which to work in trying to recover deficits.
Pension scheme members awakened by media spotlight
While the attention the flurry of transferring-out has turned on employers may not be especially good for them, it has been extremely good for scheme members.
As in all matters relating to investments and pensions, the greatest danger comes from an individual neglecting their affairs while simply hoping that, if left to their own devices, matters will play out in their favour.
The key to responsible and effective management of any pension’s assets is to maintain a proper understanding of the dynamics and risk affecting your position, and of the opportunities available to you (and the risk associated with these).
Armed with this information, and the guidance of an experienced professional adviser, you should be able to work towards a secure retirement, making optimum use of your savings.
How PWS looks at the transfer-out question for clients
With this in mind, what are the key matters that we look at for our clients to help them in considering whether it would be beneficial or not for them to transfer holdings in defined benefit schemes to personal pensions?
“It varies, to an extent, from client to client”, Stacey Arcus explains. “We never assume that any two clients will have the same needs. People want to retire at different ages. They have differing dependent obligations. Different risk appetites. And very different plans for how they’d like to live in retirement. But there are probably six core considerations that shape how I approach a review of whether or not to transfer for any PWS client.”
So what are Stacey’s ‘big six’ considerations?
- Funding level and deficit of the scheme. It’s vital to gain a proper understanding of the state of the scheme. How healthy is it looking? Is it running a worrying deficit at this point? Does it have in place a cogent and credible strategy for addressing the deficit? Are there signs that the scheme’s trustees are committed to protecting their scheme, or suggestions that they are anything but? Getting together this picture is vital. You may have any number of reasons for wanting to move house, but the most important thing to understand before you decide is whether your current house is safe to live in, or likely to collapse.
- Retirement age and income amount offered. Next, you look at the retirement age available to you within the scheme, and whether this is in line with your current plans. It’s important to be aware that some schemes have already pushed retirement ages backwards in order to help relieve pressure on their resources, while others are seeking to make the changes required to do so. Similarly, your own view on the age at which you’d like to start receiving income from your pension may have changed since you joined that scheme.
- Do the scheme’s terms suit your circumstances? However reasonable a scheme’s retirement age might be, and however well its fund has performed, it needs to suit your personal circumstances and plans for retirement. It also needs to fit in with the plans and circumstances of your partner or other members of your family, if you have these. Where are you planning to live in retirement, both immediately and as you grow older? If you are working overseas, will you stay where you are now or return to the UK, where the cost of living is likely to be higher? If you are working now in the UK, are you considering retiring overseas, where the cost of living may be lower? How do you envisage spending your time once you retire? And do you have lump sum or ongoing obligations – like paying for a child’s wedding or for university – to allow for in addition to financing retirement living?
- Other retirement assets. Your savings in the scheme you are considering transferring out of are unlikely to be your sole asset. It’s important to review the scheme pension both in its own right, and in the context of your whole portfolio. Sometimes, forces that might suggest the wisdom of transferring out when a defined benefit scheme is viewed in isolation, may be offset by the performance and risk of other assets you hold.
- Enhanced transfer values. We are still in a period in which the high price of gilts has caused defined benefit scheme operators to offer extremely high transfer-out values to members leaving their schemes. This level of transfer-out value will not last for ever and so it does, naturally, have a bearing on the decision on whether or not to leave a scheme. It is by no means the only consideration, however.
- Level of control. The amount of control you would like to have over your pension pot, both while you are still working and once you retire, is a key consideration. Defined benefit schemes, operated by your employer or former employer, offer little or no flexibility above deciding to remain or to leave. After that, your options are largely limited by the terms of the scheme. If you transfer out and into a personal pension scheme, then you gain flexibility both in how cautiously, aggressively (or imaginatively) you invest your money, and over how you choose to use your pot once you reach retirement.
Getting expert help in making your decision
The rush to leave defined benefit schemes should not lead you into a snap, and perhaps unwise, decision to leave a scheme you are yourself a member of. However, it should open your eyes to the importance of obtaining a proper assessment of your position so you can make an informed decision.
As always, if you are a PWS client then your Client Adviser will be pleased to talk over any decision you may be considering. He or she will go through your considerations and options with you, and do the required research for you, if you’d like them to.
If you are not currently a PWS client, you can still seek our help if you’re trying to decide on your best course of action. Contact us and we’ll arrange for an Adviser to discuss matters with you.