Defined benefit (DB) pension schemes should proactively consider introducing partial transfers as an option for members, according to a policy paper from mutual insurer Royal London and consultancy LCP.
According to the research report, entitled “Best of both worlds?”, an estimated 500,000 members had already transferred well over £60bn (€66bn) out of DB schemes since April 2015, when the new pension freedoms were introduced. The vast majority had given up all of their rights in the DB scheme in exchange for a lump sum transfer into a defined contribution (DC) arrangement.
“But for some individuals, such as those whose entire lifetime pension right lie in a single DB scheme, a better option might be a partial transfer, combining some continued level of guaranteed income from the DB scheme with a more modest transferred lump sum,” the authors said.
A Royal London survey of around 350 financial advisers found that while some clients who might have taken full transfers might in future only take partial transfers, there would be many others who did not take a transfer at all but who would now be likely to consider a partial transfer.
Meanwhile, a survey by LCP of over 100 occupational pension schemes revealed that 22% of schemes now offer a partial transfer option, up from about 15% in 2017. It also found that partial transfers were not the preserve of large schemes: two-thirds of the schemes in the survey offering partial transfers had assets under £500m.
However, where partial transfers have been offered, initial take-up has often been low, partly because this option needed to be effectively communicated in a clear and timely way.
Ford’s UK pension scheme last year announced plans to introduce partial transfers.
“Our research shows that growing numbers of schemes are offering partial transfers, but many more could make this option available to their members.”
Jonathan Camfield, partner at LCP
Jonathan Camfield, partner at LCP and co-author of the report, said: “Our research shows that growing numbers of schemes are offering partial transfers, but many more could make this option available to their members.
“Although there are technical and practical issues which schemes would need to address, large and small schemes have already demonstrated that these can be overcome.”
He added that greater access to partial transfers would also benefit schemes by reducing risks in the DB transfer process.
According to the report, a benefit of partial over full transfers for schemes was that partial transfers would reduce overall liabilities but in a way that would minimise any risk of a challenge from (ex) members who might otherwise blame the scheme if things worked out badly post-transfer.
“For the employer,” the report added, “current and former employees are likely to welcome the new flexibility without them being exposed to the risks associated with a full transfer; Pension Protection Fund levy bills and the cost of de-risking are also likely to be reduced as the scale of scheme liabilities falls as a result of partial transfers.”
The report’s authors called on government and regulators to encourage schemes to offer the option of a partial transfer. The Financial Conduct Authority is currently consulting on the issue.