The rush to transfer out of defined benefit (DB) schemes has seen the vast majority of FTSE 350 pension funds pay out more than they received last year.
According to research from Goldman Sachs Asset Management (GSAM), 90 per cent of the schemes of the biggest companies in the UK were cashflow negative in 2017, up significantly on the 60 per cent in 2012.
GSAM identified two reasons for this development. First, the vast majority of schemes are closed to new members, which means they have matured since 2012 and are currently paying pensions to an increasing population of pensioners.
Second, more members are using their pension freedoms and opting to transfer out.
The acceleration of benefit payments has been increasing steadily since 2013 and registered a sharp hike in 2017, the research showed.
In 2017, £36.8bn was withdrawn from pension schemes, according to data from HM Revenue & Customs.
On a net basis, the FTSE350 pension schemes paid out £21bn of assets in 2017 alone – a threefold increase on the previous year.
The impact of maturing schemes and pensions freedoms differs between industries, GSAM stated.
In the basic materials sector, for example, schemes are likely to have large memberships reliant on their DB pension for the majority of their retirement income. As such, few members would be expected to take out lump-sums or ask for transfer values.
In contrast, schemes with financial companies as a sponsor saw significant increases in outflows in 2017 as they experienced a spike in take up of transfers out and pension freedoms.
GSAM stated: "This is perhaps not unsurprising given the membership of these schemes is likely to be highly financially literate, less reliant on one pension pot to generate retirement income and also more focused on managing in-retirement and inheritance tax liabilities."
GSAM warned the development brought two distinct risks for scheme trustees around closing the funding gap and governance requirements.
A scheme seeking to generate returns to close a funding gap becomes increasingly sensitive to the order in which returns are generated, and trustees should be aware of that when designing the investment strategy, it said.
At a most basic level, trustees will need to consider more regularly which asset classes to sell in order to meet benefit payments, and keep a much tighter control over cash balances.
As the gap increases, trustees may need to spend more time understanding the issues this creates and agree on an investment strategy which helps manage the risks involved, it added.
FTAdviser reported in July that schemes with cashflow issues might decrease the transfer value for the remaining members.
According to Nathan Long, senior analyst at Hargreaves Lansdown, the spike in people transferring away from DB pensions was a "mixed blessing" for the schemes themselves.
He said: "More people leaving reduces the liabilities left to pay out, but it also means managing the assets to ensure sufficient cash to pay out all of these pensions can be problematic.
"The problem though is very much for the scheme and should not dent the perception for members that DB schemes are a bedrock of retirement income, and the starting point should be that they are best left untouched."
maria.espadinha@ft.com
