A recovery in gilt yields from their post-Brexit lows has done little to dent record high defined benefit transfer values, according to Xafinity.
Following the vote to leave the EU in June, and the subsequent Bank of England rate cut to 0.25 per cent, 10-year gilt yields tumbled well below 1 per cent for the first time in history.
That increased the cost of to DB schemes of funding their liabilities, pushing up the cash value of a 64-year-old's £10,000 a year pension from £210,000 on 1 June to £243,000 at the end of September.
Over October, however, gilt yields shot back up above 1 per cent, and currently stand at 1.3 per cent. However, that recovery only reduced transfer values by £5000, to £238,000.
The reason for this apparently disproportionate reduction, according to Xafinty, was the higher projected rates of inflation.
“October saw very significant increases in nominal gilt yields which all other things being equal would have reduced transfer values," Xafinity's Paul Darlow said.
"However, most members’ benefits increase in payment in line with inflation. Inflation expectations increased over October, meaning that transfer values for members with inflation-linked benefits (as measured by the Xafinity Transfer Value index) stayed at very high levels.”
Financial advisers offering DB transfers have reported huge increases in demand for the service since pension freedoms came in 18 months ago.
However, relatively few advisers offer the service, put off by regulatory requirements and PI insurance issues.
The Financial Conduct Authority came under fire recently for its stance that DB transfers are generally bad value.
In October, former pensions minister Steve Webb told MPs on the Work and Pensions Select Committee that record transfer values meant that encouraging transfers good be the advantage both of members and pension schemes.
He urged the FCA to rethink its approach.
Nigel Chambers, director of pension transfer technology firm CTC Software, made a similar point, claiming up to 40 per cent of people in DB schemes could be better off if they transferred out.
The Work and Pensions Committee is currently investigating ways to repair what is widely viewed as a funding crisis in the DB sector.
However, earlier this month The Pensions Regulator argued that "screaming headlines" putting the total DB deficit at over £1trn were exaggerations, and that the real figure was between £350bn and £400bn.
james.fernyhough@ft.com
