The UK’s decision to leave the EU has pushed gilt yields to historic lows, pushing defined benefit transfer values to record highs, Xafinity analysis has found.
Following the EU referendum on 23 June, UK 10-year gilt yields tumbled to below 1 per cent for the first time ever, increasing the cost for DB schemes to meet their liabilities.
This automatically increased the value of DB transfers, which are calculated according to the cost of meeting liabilities.
Xafinity calculated that on 30 June, a 64-year-old with a DB pension worth £10,000 a year could expect to receive a cash sum of £223,000 if they transferred now.
That was the highest value in the two-year history of the Xafinity Transfer Value Index, and according to Xafinity’s head of propositions Paul Darlow, possibly the highest of all time.
He told FTAdviser post-Brexit, it had become more expensive for DB funds to meet their liabilities, because their favourite type of investment - UK gilts - were no longer doing the heavy lifting.
But unfortunately for DB schemes, this also meant the value of DB transfers had gone up, because they are calculated according to how much of today’s money it will cost the scheme to make good on promises to members.
The 30 June value of £223,000 was £20,000 more than the value on 1 January this year and £25,000 higher than in March 2015.
Mr Darlow added that, given gilt yields had continued to fall, the value today would likely be higher still.
While this was “good news for members looking to take a transfer value of their defined benefits”, he stressed that it should “absolutely not” be read as advice to transfer out of a DB scheme.
“This is where the view of independent financial advisers will become really important - whether now is a good time to transfer, or whether to wait.”
Mr Darlow added current high values were “not good news for pension schemes themselves”, as they should consider whether paying out significant amounts of transfer values when deficits are high, and asset values are perhaps depressed, could have a detrimental impact on their financial position.
Jon Hatchett, head of corporate consulting at Hymans Robertson, said a 25 basis point fall in bond yields would result in UK pension liabilities increasing by 5 per cent - or £100bn.
He said: “The market seems to expect such a scenario, with UK 10-year gilt yields having dropped to the lowest level in history, suggesting expectations of further cuts to interest rates and more quantitative easing.”
On Wednesday (6 July), 10-year gilt yields were at 0.77 per cent.
However, Mr Hatchett added: “The impact on DB schemes is by no means uniform; much will depend on the hedging strategies individual schemes put in place pre-referendum.”
james.fernyhough@ft.com