Financial experts are predicting more than a million retirement savers will transfer out of their direct benefit workplace pensions over the next 25 years.
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The number of savers looking to escape their direct benefit schemes has soared in recent months.
Consultancy Hymans Robertson says the main reason workers want to flee their pensions are financial, although many have a lack of confidence their employer will deliver their promises.
One of the main drivers triggering 40,000 savers to move their pots each year is expected to be pension freedoms.
Few direct benefit schemes offer savers the chance to take their cash from the age of 55 to spend how they wish.
Lure of golden goodbyes
But the lure of an enhanced cash transfer value of 20 times or more the first year’s expected pay out can mean someone with a modest £20,000 a year pension receiving a cash offer of £400,000 to leave the scheme.
With around 70 of FTSE 1000 schemes running with deficits of up to £1.75 billion, the fear for many savers is their employer may go bust leaving the government’s Pension Protection Fund to salvage their retirement dreams.
The PPF will safeguard pension savings, but at a cost – paying 90% of expected benefits and capping annual payments at around £35,000 for high earners.
Hymans Robertson expect the number of defined benefit schemes will fall to about 1,000 – less than a fifth of the number of current schemes – over the next 25 years.
The report explains direct benefit schemes will consolidate to cut costs, to protect benefits for members and manage risks better.
Savers on the move
Jon Hatchett, a partner at Hymans Robertson, said: “It is already happening. Along this road, we will see the popularity of consolidation solutions such as sole trusteeship, defined benefit master trusts, investment platforms and other mid game consolidation vehicles take off.
“We will also see new innovations enter the market, ranging from non-insured risk transfer vehicles to superfunds.
“In terms of the members of these schemes, we could see around one million consolidated into defined benefit master trusts.
“These are already popular in the defined contribution space, but they already exist and are gaining ground in defined benefit too for similar reasons: reducing cost and improving governance.
“Our estimates suggest around 2 million members will move into the gold standard of consolidation vehicles: buy-outs with insurers.”
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