DB transfers drop to five-year low following contingent charging ban

Defined benefit (DB) pension transfers dropped to a five-year low in the most recent complete quarter, which LCP attributed to the “sizable impact” of the ban on contingent charging.

The firm’s analysis of DB transfer data showed that 25 out of every 10,000 DB members transferred into a defined contribution (DC) arrangement in the third quarter of 2020, the latest quarter with full transfer payment experience available due to the lag between a quotation being issued and the corresponding payment being made.

This represented a drop of 62 per cent from the peak of DB transfers in the third quarter of 2017, when 66 out of every 10,000 transferred, and the lowest level of transfers since early 2016.

Additionally, LCP noted that just under a fifth (19 per cent) of quotations issued in the third quarter of 2020 were being paid out.

The firm stated that the contingent charging ban had led to significant market flux as some advisers switch to higher up-front advice fees to maintain profitability, while others deciding to leave the DB transfer advisory market altogether.

However, LCP added that the industry could be seeing the beginnings of a rebound in DB transfers back to pre-pandemic levels, with 136 quotations per 10,000 deferred members being issued in the first quarter of 2021, an increase of 17 per cent on the previous quarter and an increase of 22 per cent compared with the second quarter of 2020, when the pandemic began to make an impact.

Request activity is understood to have remained broadly at the same rate through April and May as that seen in the first quarter.

LCP partner, Bart Huby, commented: “It’s clear that the ban on ‘no transfer, no fee’ arrangements is already having a significant impact on transfers. While this should be welcomed because it means that members are less at risk of potentially compromised advice, there is a danger that members may find the market too pricey and so not progress past the quotation stage.

“The fact that take-up rates for smaller transfers have decreased sharply in the last quarter is already indicating this may well be the case.”

LCP associate consultant, Andrew Pijper, said: “While the contingent charging ban is keeping transfer take-ups low, the green shoots of post pandemic recovery can be seen in the rise in the number of new transfer quotations.

“While it’s too early to say whether this increased activity will translate into more transfer payments, the indication is that more members are starting to plan for their financial future again as the pandemic recedes and life gradually returns to normal. Whether all these members will be able to access affordable advice is, however, another question.”

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