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FRC: Results of review of transfers from Defined Benefit to Defined Contribution schemes

The Financial Reporting Council (FRC) yesterday published the results of the Joint Forum on Actuarial Regulation’s (JFAR) review of transfers from Defined Benefit (DB) to Defined Contribution (DC) schemes.

The review sought the views of Scheme Actuaries and other pensions professionals, and was undertaken to help JFAR understand the impact on actuarial work of pensions freedoms introduced in April 2015 and any consequent impact on actuarial regulation.

The review found that since these pension freedoms were introduced there has been an increase in DB transfer quote requests and a small increase in actual transfers but overall, the numbers remain low.

The initial increase in transfer activity may not have been as great as expected due to the nature of the transfer process, in particular the availability of products and providers able to accept transferred funds, scheme members’ understanding of the options, and the availability and cost of advice plus the FCA’s rules underlying that advice.

The value that members of DB schemes place on their benefits, in particular certainty and perceived security, and evidence that some trustees are not actively promoting transfers may also explain the low take up for transfers. However, some employers with DB schemes have recognised the opportunity to de-risk their schemes and are showing interest in the new freedoms.

Scheme Actuaries reported an increase in work to review the assumptions and the appropriateness of the values placed on benefits transferred out. In a small proportion of schemes transfer values were reduced due to underfunding.

In around two thirds of schemes Actuaries provided advice that transfer value assumptions should be reviewed. In around 40% of schemes, advice was given on the need to review commutation factors used to convert part of a pension into a lump sum on retirement. Work on reviewing ‘trivial’ commutation factors to convert small pensions into a cash sum, and work on insufficiency reports, when trustees wish to reduce transfer values in underfunded schemes, has increased.

The increase in transfer activity that the review noticed was mainly among the over 55s for whom the new freedoms include the opportunity to cash in their funds (subject to a tax charge), and among those with large transfer values.

The review was conducted between April and October 2015, and received responses from 311 Scheme Actuaries, representing 35% of all DB schemes in the UK. Discussions were also with a number of key participants in the pensions market including The Pensions and Lifetime Savings Association and The Pensions Advisory Service.

Commenting on the results of the review, Stephen Haddrill, FRC CEO and chair of the JFAR, said

“As we know, the new pension freedom rules change the landscape for people saving for their retirement. It is vital, therefore, that the quality of actuarial work that supports the market is of the highest quality. As a result of this review, I’m pleased to see the JFAR has decided it will monitor ongoing transfer activity and related actuarial matters.”

As a result of this review, JFAR will continue to monitor the level of transfer activity and any actuarial issues arising in this area.

Notes to editors:

  • The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
  • The Joint Forum on Actuarial Regulation (‘JFAR’) was established in 2013 by the Financial Reporting Council, the Institute and Faculty of Actuaries, the Financial Conduct Authority, the Pensions Regulator and the Prudential Regulation Authority. The JFAR is a unique collaboration between regulators to co-ordinate, within the context of its members’ objectives, the identification and analysis of public interest risks to which actuarial work is relevant.
  • This review is one of three reviews that the JFAR is undertaking in 2015/16 as signalled in its published feedback statement on the discussion paper ‘Joint Forum on Actuarial Regulation: A risk perspective’. The other reviews focus on General insurance provisions and Group think.
  • All Press enquiries should be directed to:​

Peter Timberlake, Head of Communications, on telephone: 020 7492 2397/ 07768 502332, or email: p.timberlake@frc.org.uk.

Rita Carolan, Communications Manager, on telephone: 020 7492 2307/ 07428 149096 or email: r.carolan@frc.org.uk.

Alana Sinnen, Communications Manager, on telephone: 020 7492 2395/ 07949 005526 or email: a.sinnen@frc.org.uk.

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