Personal PensionAug 22 2016

Falling gilt yields could spur rise in requests for DB transfers

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Advisers with clients considering transferring from a defined benefit (DB) scheme in the face of falling gilt yields should warn against requesting multiple transfer values as the procedure may backfire, according to Intelligent Pensions.

Moves by the Bank of England and the reaction from markets following the EU referendum have meant that gilt yields have fallen substantially, which has placed pressure on DB pension schemes.

Most DB schemes use gilts as a long-term way of planning for payments to members when they come to retire. But yields have fallen dramatically due to the flight to safety following the Brexit vote and, more recently, the announcement of an increase in quantitative easing.

The assumption made by many is that schemes will have to put aside more money to cater for the same retirement commitment in the future, prompting some members to request an additional transfer value, which they can use to take out of the scheme and put to other purposes.

David Trenner, technical director of Intelligent Pensions, said: “If a client is going to pay for a transfer value, fundamentally he’s saying, ‘I’m going to transfer and I want a higher value.’ If a trustee sees a lot of people doing that, he must ask, ‘are you weakening the scheme?’

“If a transfer value increases, the extra money can only come from the pooled fund and, however miniscule the effect, this must weaken the security of other members.”

This means that a scheme may clamp down on the number of transfer values above its legal obligation, and even reduce benefits if it sees many people applying for them.

Scott Gallacher, chartered financial planner from Leicester-based Rowley Turton, said: “I think that’s probably a bit overblown. Most people won’t be doing this; the majority of final salary schemes are worth a lot more.”