The amount of money flowing out of FTSE350 companies’ defined benefit pension schemes rose by 17 per cent in 2016, with the number of transfers running at ten times the level of before the new freedoms came into being two years ago.
According to Willis Towers Watson’s analysis of company accounts, a spike in the number of members transferring to defined contribution schemes to gain unfettered access to their retirement pots, as per the April 2015 rules, should explain most of the increase.
However it noted published accounts do not separate transfers from regular pension payments and tax-free lump sums at retirement.
In total there were 101 companies with defined benefit pension schemes and 31 December reporting dates in the FTSE350 index in both 2015 and 2016.
Payments from these schemes increased from £20bn in 2015 to almost £23.5bn in 2016. A quarter of employers reported that payments rose by at least 25 per cent year-on- year.
Charles Rodgers, a senior consultant at Willis Towers Watson, said: “In our experience, the number of people transferring was almost twice as high in 2016 as in 2015, and members with bigger pensions have been disproportionately likely to transfer.
"However, the real surge did not come until late 2016/early 2017, so will not be fully reflected in 2016 accounts.
"Recently, the number of transfers has been running at about 10 times the level seen before ‘pension freedom’ was announced; if this continues, next year’s company accounts should tell a more dramatic story.
"Lower interest rates have pushed up transfer values. Sums equivalent to 25, 30 or occasionally even 40 times the annual pension have proved tempting to members.”
Pensions rise with inflation every year and the pensioner population is growing, so transfer activity is not the only explanation for the 17 per cent rise in benefit payments, but it is likely to have been the major factor.
In most schemes, the number of transfers in 2016 will have been small in relation to the total membership, though some members who have stayed in the scheme so far will just be keeping their options open until they are closer to retirement.
Transfer rates can also be much higher where employers pay for independent financial advice.
Previous Willis Towers Watson research found that 31 per cent of members over 55 whose employers offered to do this had chosen to transfer out in 2016/17 (56 per cent engaged with the adviser and 55 per cent of these transferred).
Allan Maxwell, chartered financial planner at Corporate Benefits Consulting, Glasgow is not surprised by this increase in the funds flowing out of DB pension schemes "as it reflects the large number of requests that we are getting to provide DB transfer advice".
He adds: "It is likely that the majority of these transfers are from well funded schemes where the employer has a strong covenant and wishes to remove the ongoing uncertainty of DB liabilities, whereas employers with poorly funded schemes are likely to see less activity as the transfer values offered may be at reduced levels.”