Defined Benefit  

Rate rise to reduce pension transfer values

Rate rise to reduce pension transfer values

The Bank of England's decision to increase the base rate from 0.25 per cent to 0.5 per cent is expected to drive down defined benefit (DB) pension transfers, Sir Steve Webb warned.

Commenting on the Bank of England’s decision to increase rates for the first time since the financial crisis, the director of policy at Royal London said anyone considering a transfer may wish to take impartial advice on the pros and cons of a transfer "as a matter of urgency, as transfer values are unlikely to remain at today’s very high levels”.

Nathan Long, senior pension analyst at Hargreaves Lansdown, also shares this opinion, since an increase in rates will imply gilt yields increasing.

He said: “There is a direct link between gilt and bond yields and the liabilities on final salary schemes."

The raised base rate would likely feed through to lower scheme deficits, however it could also mean the end of the historically high scheme transfer values we have seen in recent months, he added.

With the introduction of pension freedoms in 2015, savers have been seeking to take advantage of the high transfer values of DB schemes and to move their nest eggs into defined contribution plans.

But overall the base rate increase should provide “a modest boost for pensions,” Sir Steve argued.

He said: “If today marks a turning point in interest rates this should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes.”

According to data from PWC, the deficit of DB pension funds in the UK stood at £410bn at the end of October.

However, it is “is important not to get carried away,” Sir Steve warned.

He said: “Assuming that the Bank of England sticks to its plan for ‘gradual and limited’ increases, this announcement is unlikely to radically transform the pensions landscape as rates remain at historically low levels.”

Alex Hutton-Mills, managing director of Lincoln Pensions, also shares this opinion.

He said: “Whilst today’s decision […] will marginally improve the funding position of some schemes, it has been expected and priced in for some time.

“Any improvement in funding will be modest as many schemes still contain significant levels of investment risk.”