The rise of defined contribution pensions: do you have an investment strategy?
The pensions industry in the UK has been dominated, by and large, by one key theme over the past decade: the rise of Defined Contribution (DC) schemes and the fall of Defined Benefit (DB) ones. Mark Stevens, Head of Intermediary Services, Investec Wealth & Investment, discusses the change.
The shift has been profound – putting the onus firmly on investors themselves to save for their retirement.
A related and growing trend over the past couple of years has been the rise of people with DB schemes proactively transferring out of these into DC plans. The trend has been catalysed by the changes introduced under the ‘pensions freedoms’ regulations enacted two years ago.
The current financial situation
In the current financial climate, with low bond yields and ongoing political uncertainty driving cautious market sentiment, the values being placed on DB schemes has in many cases risen substantially.
Despite the general view that ‘cherished’ DB schemes provide excellent benefits and income, many people have taken advantage of the high values and cashed in their DB pots, transferring into a DC scheme. It is a trend that is likely to accelerate.
Research commissioned by Investec Wealth & Investment1 found that two thirds of financial advisers expect client enquiries about transfers from Defined Benefit to Defined Contribution schemes to increase over the next 12 months.
Two thirds (65%) said they expect client enquiries about transfers from DB to defined DC schemes to increase over the next 12 months, with almost a fifth (19%) expecting a “significant” increase. In contrast, just 2% said they expect a fall in enquires.
According to the research, almost three quarters (72%) of advisers have received DB transfer enquiries, up from 68% in July 20162. In addition, advisers predicted that, on average, they will continue to receive enquiries for a further nine years, generating a substantial long-term new business opportunity.
The wider market and historic challenges
However, despite the volume of potential business, the findings revealed why many intermediaries are declining to provide DB transfer advice.
The top reason given (cited by 71%) was that the risks associated with challenges to historic advice were too high. Nearly half (47%) of advisers said that the process is complex and clients are resistant to paying appropriate fees while 45% cited a perceived lack of regulatory support.
Almost a third (31%) fear that there is too much of a focus by the regulator on the ‘headline’ figures involved in a DB transfer at the expense of ‘softer’ client needs.
The new normal
As the wider market environment adapts to a ‘new normal’, the values being placed on DB scheme transfers have become very attractive and the demand for qualified advice shows no sign of slowing down.
Investec Wealth & Investment believes that while defined benefits scheme transfers have increased the opportunities for advisers and other intermediaries to advise new clients on their pensions and broader financial needs, it’s a fast-changing market.
The complexities and risks involved mean that in many cases discretionary investment managers are integral to the effective management of client portfolios.
Do you need advice on your financial investment strategy? We can help.
About the author
Mark is the Head of Intermediary Services. He has over 40 year’s experience within the private banking, wealth management and investment industry. He joined Lloyds Estate & Trustee Division in 1975, and subsequently gained significant experience in fiduciary services, delivering independent financial advice, sales management and as a qualified Investment Manager.
1 Research conducted online by PollRight among 108 intermediaries in March 2017
2 Research conducted online by PollRight among 98 intermediaries in June 2016
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The views expressed are those of the author and not necessarily those of ICAS.