Pension Transfers hit the £50 billion mark as transfer values rocket – Treasury and FCA meet to discuss.



Posted on: 9th August 2017

Does the Treasury really believe that the £50 billion transferred out of final salary pensions could stimulate the UK economy?

Pension freedoms have changed the landscape

It’s two years since pension freedom reforms came in. The number of people transferring valuable rights out of defined benefit or final salary pension scheme has shot through the roof since then. It’s estimated that £50 billion has been moved from schemes to individuals, with almost 80,000 transfers going through in the twelve months from March 2016 to March 2017.

Most of the pension money has been transferred to defined contribution, or money purchase, schemes where the ultimate pension will depend on how much an individual has put in their pot and how much it has grown.

FCA Interest

The huge movement of capital has raised the interest the Financial Conduct Authority (FCA), which is inspecting the quality of financial advice in this area. But it is also of interest to the Treasury.

In the last few weeks, Citywire’s New Model Adviser® put in a freedom of information request, asking if the treasury had held any meetings with the FCA to discuss defined benefit pension transfers.

The simple answer was that, yes, they had. The Treasury said:-

“A telephone conference with the FCA staff on the specified subject (defined benefit transfers) took place on 15th March 2017. Two Treasury policy officials participated, but no ministers.”

Treasury Interest in Final Salary Pension Transfers

Reports suggest that the Treasury is not keen to outline what exactly was discussed. But it seems that it’s interest in defined benefit pension transfers stems from the Government policy to see pension freedoms to succeed. In the last year, the Treasury made £1.5 billion in tax receipts from pension freedoms last year,  £1.2 billion more than expected!

But there are also other benefits from pension transfers that could greatly interest the Treasury as well.

Consumer Benefits

The flow of money from defined benefit pensions into consumers bank accounts is unprecedented. Standard Life were recently reported as saying that the rise of defined benefit transfers has created a wave of unexpected “lottery winners”.

These new lucky transferees, will inevitably want to spend some of their newfound wealth on consumption – be it new homes, home improvements, or for helping their children pay for their first homes. Or maybe even, in some cases, for that Aston Martin they’ve always wanted!

Increased consumer activity is very much in the Treasury’s interest. Yes, they will benefit from the increased tax, but anything that helps to inject more life into the economy is good for them. The new spending power of those defined benefit pension transfer winners are exactly what the Treasury wants.

Everyone’s a winner!

For the corporate or public pension providers who are happy to pay out all this money in transfers, there is a lot to benefit from too. Transfers provide an excellent way a way for them to get rid of long-term liabilities. This frees 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.

It’s the economy … stupid …

In the 3 month period to June 2017, the UK economy grew by just 0.3%. This small growth, and the uncertainty around Brexit has led to a certain amount of tension in the stock market, and clearly in HM Treasury as well. Any injection of cash into the economy is good. And it’s not difficult to see why the Treasury would be very interested in the increase in pension cash flows.

So, not only does the Treasury want to see pension freedom limits disappearing, it is also very happy with the short-term effect of billions of pounds moving through the system as a result of pension transfers.

Another PPI?

It’s been reported in that the amount of money coming to consumers from bank over payment protection insurance (PPI) claims did more to aid the recovery than quantitative easing from the Bank of England. In this light, it is easy to see why the Treasury would want to promote pension benefit transfers, and would certainly not want the FCA to stem the tide of transfers.

Whether this was raised in the Treasury-FCA meeting, we will never know. What was said in the meeting on pension transfers is not likely to be made public. But it is clear that final salary pension holders are not the only ones benefiting from the current situation.