Defined Benefit  

Pension transfers to hit £60bn over next three years

Pension transfers to hit £60bn over next three years

Transfers from defined benefit (DB) schemes will hit £60bn over the next three years, according to estimates from Mercer.

In its risk transfer outlook for 2019, the consultancy firm said the volume of transfer values taken by individual members has increased significantly.

For many years, transfer values paid each year by DB schemes in the private sector averaged around £3bn, which compared to an estimate of £20bn to be paid in 2018, Mercer said.

£8.6bn were transferred out of DB schemes in Q3, a decrease of 18.4 per cent when compared with March values.

Transfer payments, paid in respect of individuals who have yet to retire, tend to reduce risk for the pension scheme making the payment, as well as reduce any gap between the value of the scheme’s assets and the cost of buying out and winding up the scheme, it added.

Overall, Mercer forecasts that for the first time ever nearly £333bn will be paid by UK private sector DB schemes in the next three years.

This number compasses pension transfers and the "rapidly growing buy-in and buy-out market, where the forecast is for unprecedented premium volumes to be paid to insurers," Mercer said.

The consultancy firm expects the result of these payments to lead to private sector DB schemes in aggregate being better funded with a lower risk profile.

Andrew Ward, partner at Mercer, said "a third of a trillion pounds is a huge sum of money and shows how the UK’s DB pension landscape is changing rapidly".

He said: "In aggregate, UK company DB schemes are expected to be better funded and bear less risk in three years’ time. There are headwinds, not least the potential for Brexit to disrupt the landscape, but the direction of travel is clear."

Mr Ward argued that as the market matures there is potential for emerging consolidators.

He added: "How this will impact the amount paid by DB schemes depends on how the new offerings are received by scheme sponsors and trustees.

"The recent consultation announced by the Department of Work and Pensions and The Pensions Regulator’s guidance will propel discussion in this area."

maria.espadinha@ft.com