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Pension freedom reforms have spawned a new mini-industry around transferring valuable rights out of defined benefit or final salary pension schemes.
With 80,000 transfers going through over the 12 months to 31 March 2017, the market is clearly booming. Consultancy firm Mercer estimates £50 billion has been moved from schemes to individuals since the pension reforms were introduced two years ago.
Most of the money has been switched to defined contribution, or money purchase, schemes where the ultimate pension will depend on how much an individual has put in his or her pot and how much it has grown.
This has created a bit of bonanza for fund managers, who get a chance to attract more money for them to invest in bonds and shares.
Such a huge movement of capital is clearly not only interesting to the Financial Conduct Authority (FCA), which is inspecting the quality of financial advice in this area, but also to HM Treasury.
A freedom of information (FOI) request made by Citywire’s New Model Adviser® asked the Treasury if it had held any meetings with the FCA to discuss DB transfers.
The answer was yes.
The Treasury responded: ‘A telephone conference with the FCA staff on the specified subject [DB transfers] took place on 15 March 2017. Two Treasury policy officials participated, but no ministers.’
The Treasury was as tight-lipped on the matter as its grip on the nation’s purse strings, but its interest in DB transfers will stem from its desire for the pension freedoms to succeed.
The Treasury made £1.2 billion more than expected in tax receipts from the freedoms last year (totalling £1.5 billion). But the flow of money is also boosting consumers’ bank accounts.
Indeed, the rise of DB transfers was recently described by Standard Life as having created a new wave of unexpected ‘lottery winners’.
With the rise of these new lucky DB transferees, it is inevitable they will use some of it on consumption, such as helping their children pay for their first homes (or even buying new sports cars).
So perhaps the Treasury’s interest is not just in the tax take, but how DB transfers might help inject a little more life into the economy as the older generations flex their newfound spending power.
Transfers are also a way for large corporations to get rid of long-term DB liabilities, freeing up the businesses for growth. The Financial Times reported in June that one financial services company used transfers to knock off £100 million from pension liabilities over a six-month period.
The UK economy grew by just 0.3% over the three months to June. Throw Brexit uncertainty into the mix and it is clear to see why the Treasury would be interested in pension cashflows. Not only does the Treasury not want to see any limits placed on the pension freedoms, it will be happy with the short-term effect of the billions moving through the system because of transfers.
It has been said before that the amounts shelled out by banks over payment protection insurance (PPI) claims did more to aid the recovery than quantitative easing from the Bank of England – PPI was more effective at putting spending money in peoples’ pockets electronic money printing.
Therefore the Treasury would have no reason to want the FCA to stem the tide of transfers.
What was said or was not said at the meeting between the Treasury and FCA on pension transfers is unlikely to be made public. But it is clear that while financial services has enjoyed the churn generated from the pension reforms, the Treasury has also been a winner from the DB transfer glut.