Savers have been warned against rushing to transfer out of their defined benefit pension over rising interest rates and fears of falling transfer values.
Analysis by consultants LCP revealed although transfer values have fallen in the past few months, it is far from inevitable that they will continue to fall, and there are some reasons to think they may recover.
A typical transfer value quotation in the first quarter of this year was just under £300,000, compared with a peak of just over £400,000 in the final quarter of 2021, according to LCP.
The estimates by LCP were based on transfer value quotations for more than 70 DB schemes.
The chart below shows annual figures from 2014 to 2019 and quarterly figures from Q1 2020 onwards. It shows figures for all transfer value quotes issued (grey bars) and for those actually taken up (orange bars).
Source: LCP
In 2010 when long-term interest rates fell to low levels, the transfer values offered by DB pension schemes reached record levels, LCP explained.
This was because low interest rates made DB pensions expensive for schemes to finance and meant they offered higher transfer values to those willing to leave the scheme.
For many members with long-service in a DB scheme, the transfer value of their DB rights could exceed the value of their family home.
These very high transfer values were an important factor in the surge in DB transfer activity that took place in the second half of that decade, with activity peaking in 2017.
LCP said currently, members may be concerned that transfer values will fall further if long-term interest rates continue to rise, and may be tempted to rush into a DB transfer to cash-in before values fall.
However, it argued there are a variety of factors which can influence the generosity of transfer values, and while some factors may point to lower values in future, others could lead to higher values for those prepared to wait.
LCP warned members against rushing to transfer out their DB rights purely in an attempt to "time the market" for transfer values.
The research found pension schemes have discretion over how they set their transfer values, and that there can be a large variation from one scheme to the next in the transfer value offered for an identical pension.
For those 10 away out from retirement, the amount offered by some schemes can be double that offered by others, according to LCP.
It outlined that the age of the member, the generosity of the pension scheme and the longevity of members are all factors which can affect the transfer value.
The age of the member could see the transfer value for any given member rise as they get closer to retirement
This is because the scheme assumes the investments used to back the pension promise will make an investment return, and as the member ages there is less time for that return to be made, therefore the amount needed to back the member’s pension promise tends to increase and so does the transfer value.
LCP partner and author of the report Clive Harrison, said: “Although a further increase in long-term interest rates could lead transfer values to fall, there are other factors which could go the other way.
“Our research suggests that many schemes have improved their transfer values in recent years, and that trend may well continue. We also find that for an individual member their transfer value is likely to increase as they get closer to retirement, other things being equal.
“This means that DB scheme members should be careful not to ‘panic buy’ DB transfers on the assumption that transfer values will only go in one direction.”
Over time, many pension schemes are derisking their investment strategies and this is also the regulatory direction of travel.
LCP said a pension scheme with lower risk investments will tend to offer higher transfer values than one with higher risk investments.
The research found that for those 10 years out from retirement, there has been an average improvement of over 10 per cent in the generosity of transfer values for any given pension over the past three years when compared like-for-like.
LCP said if the Covid-19 pandemic leads schemes to reduce their assumptions about the life expectancy of members, this will tend to lead to a modest reduction in transfer values.
Harrison added: “Transferring out of a DB pension is a big decision which should always be made after taking careful note of expert and impartial financial advice”.
sonia.rach@ft.com
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