The rapid increase in DB transfer values has been the main spur to the rise in transfers and not greedy advisers seeking contingent charging fees, says AJ Bell.

A Freedom of Information request by AJ Bell reveals that defined benefit pension transfers surged as transfer values increased post the Pension Freedoms.

Figures used by AJ Bell show that average pension transfer value increased from a low of £258,109 in the six months immediately following Pension Freedoms, to a high of £389,545 in the year to September 2017.

The FCA recently responded to the transfer surge by proposing a ban on ‘contingent charging’ - meaning fees are only charged by advisers when a transfer takes place. Contingent charging has faced a barrage of criticism from several quarters recently for allegedly encouraging too many unsafe pension transfers.

However, AJ Bell says the data suggests that the demand to transfer pensions may have come substantially from pension savers encouraged by attractive transfer values and the ability to benefit financially from a transfer.

 Andy Bell, chief executive at AJ Bell, said: “The surge not only in pension transfer activity but the proportion of positive recommendations was undoubtedly behind the FCA’s recent proposal to ban contingent charging.

“However, soaring transfer values appear to have been a significant factor in driving DB transfer activity. In the first six months of the Pension Freedoms, for example, the average transfer value was just over £258,000 and 57% of those who received advice were recommended a transfer.

“In the next 12 months, when the average transfer value jumped to £292,000, 64% of clients who received DB transfer advice received a positive recommendation. And when average transfer values peaked at £390,000, almost three-quarters (72%) of clients received a positive transfer recommendation. 

“This makes perfect sense and suggests that the market is functioning better than the FCA thinks. The regulator’s starting position is that a transfer is not in the interests of most people but there are perfectly good reasons why a transfer will be the right outcome. This would particularly have been the case as transfer values soared to record levels and that is reflected in the proportion of recommendations to transfer.

“It must also be remembered that these figures only count people that went through a formal advice process.  Many advisers operate a triage process that filters out clients for whom a transfer is very clearly not appropriate. If these clients were included in the data the proportion of recommendations to transfer would be significantly lower.

“Over the last year data is available for we’ve seen the average transfer value decrease and the proportion of recommendations to transfer has naturally followed suit.  This trend is likely to have continued as increased regulatory scrutiny has pushed up Professional Indemnity insurance premiums for advisers, causing the advice market for DB transfers to shrink. It wouldn’t be a surprise to see the volume of DB transfers to halve for the year to end of September 2019 when the data becomes available.

“Whilst I am sympathetic to the FCA’s concerns, I don’t agree with their default position that pension savers shouldn’t transfer from a defined benefit into a personal pension.  One important point that is often ignored is that the scheme actuary of the transferring scheme is obligated to confirm that all transfer values fairly reflect the benefits being foregone, subject to certain underlying assumptions about the scheme membership. 

 Source: FCA