Defined Benefit  

DB transfer values back to near-record highs

DB transfer values back to near-record highs

Defined benefit transfer values rose by almost 2 per cent in February, pushing them close to last October's record highs, pension consultancy Xafinity has reported.

At the end of the month, a £10,000-a-year pension would have bought on average £237,000.

That represented a month-on-month increase of £4,400 - or 1.9 per cent - and brought the average transfer to within £6,700 of its October high.

It was also £27,000 more than the average transfer value before British voters elected to leave the European Union on 23 June 2016.

Back then, a £10,000-a-year pension beginning at age 65 would purchase a lump sum of just £210,000.

Xafinity put the increase largely down to a fall in gilt yields, which began around the time prime minister Theresa May unveiled her plans to trigger Article 50 at the end of January.

Lower gilt yields result in higher transfer values, because they increase the cost to a DB scheme of meeting its obligations to members.

Increases in February were tempered somewhat by a reduction in inflation projections, Xafinity noted.

Higher inflation rates increase liabilities because annual pension rises are pegged to an inflation index - either the consumer price index or the older, higher retail price index.

Xafinity's head of proposition development Paul Darlow said higher inflation projections buoyed transfer rates between October and February, cancelling out the effect of a recovery in gilt yields towards the end of the year. 

"February saw an interesting reversal in this trend – we saw both gilt yields and inflation expectations reduce over the month," Mr Darlow said. "Overall this change has been positive for transfer values."

However, he cautioned against complacency.

"With several potentially significant political events coming up, we might expect some volatility over the next few months," he said.

Financial advisers, product providers and DB pension consultancies have reported a huge surge in interest in DB transfers, which they all link to two factors: pension freedoms and high transfer values.

Today, MetLife published research that showed this increased DB transfer activity was behind an uptick of interest in guaranteed income products among financial advisers.

Prudential, meanwhile, recently revealed it would start offering financial advice to people looking to transfer out of their DB scheme, while platform provider Novia launched its own transfer value analysis (TVAS) report service.