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Pension transfer values increase on back of gilt yield fall

This article is part of
Guide to post-Brexit advice

Pension transfer values increase on back of gilt yield fall

Clients who are relying on UK sovereign bonds to provide their income in retirement will have been hit hard by plummeting gilt rates post-Brexit vote as well as volatile stock markets.

According to Ron Walker, managing director of Clarion Wealth Planning, clients’ pensions, like their other assets, are invested in line with their risk profiles.

“The longest time horizons will generally hold an equity-heavy portfolio with significant international exposure, while those who are either already living on withdrawals or within sight of doing so, will have much smaller equity holdings, biased towards UK-based income-generating stocks.”

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While Mr Walker sees no reason for this to change materially post-vote, he adds: “The main European Union exit risk we foresee relates to bonds - especially longer-dated gilts - which have looked overvalued for some time.

“We believe in the medium term there is a significant risk of a market correction, which could hit the capital of investors who believe they are holding low-risk assets.

“To counter this threat, we have been shifting clients’ sovereign bond allocations into shorter-duration bonds, which appear to be less fully valued.”


Mr Walker’s concerns over gilts has not been unfounded.

Gilt yields fell on the announcement the bank base rate - at 0.5 per cent since March 2009 - might fall further over the coming months, perhaps even into negative territory.

This has pushed pension schemes further into deficit, as figures from the latest Pension Protection Fund 7800 index has shown.

Data from the PPF for July shows:

■ The aggregate deficit of the 5,945 schemes in the PPF 7800 index is estimated to have increased over the month to £383.6bn at the end of June 2016, from a deficit of £294.6bn at the end of May 2016.

■ The funding ratio worsened from 81.5 per cent to 78.0 per cent.

■ Total assets were £1,363.4bn and total liabilities were £1,747bn.

■ There were 4,995 schemes in deficit and 950 schemes in surplus.

For people invested in so-called gold-plated defined benefit (DB) pension schemes, this will come as a significant blow, as according to the PPF, even a 0.1 per cent reduction in gilt yields raises aggregate scheme liabilities by 2 per cent and raises aggregate scheme assets by 0.5 per cent.

UK schemes, the PPF says, have 48 per cent invested in gilts and fixed interest.

Tom McPhail, head of retirement policy for Bristol-based Hargreaves Lansdown, comments: “Plunging gilt yields following the unexpected referendum result have caused pension scheme liabilities to soar.

“The UK’s gold-plated pension system is starting to look tarnished. Deficits are soaring, employers are reneging on their promises and still more money is needed.

“Accrued pension rights have to be respected and investors have to be able to trust the system, however there is also a growing argument for the government to look at finding a more balanced approach to the retirement funding needs of UK workforce.”