Defined Benefit  

Turbulence sees DB transfer values fall to record lows

Turbulence sees DB transfer values fall to record lows

Defined benefit transfer values hit a record low last month due to turbulent markets and increases on the yields of long-dated gilts, according to XPS Pensions.

XPS Pensions'sTransfer Value Index saw values hit an "unprecedented low" of £181,000 at the end of September. This represented a drop of £16,000 over the month, a fall of 8 per cent.

Transfer values have now fallen by almost a third this year with their largest monthly fall in September. 

Article continues after advert

The index fell as low as £150,000 on September 27, following the announcement of the “mini” Budget and subsequent market reaction, in which gilt yields briefly reached 5 per cent per annum.

Mark Barlow, head of member options at XPS Pensions, said: “Whilst the focus on pension funds in recent weeks has been largely on gilt rates and their impact on scheme investments, defined benefit promises remain largely unaffected. 

“However, pension scheme members considering a transfer will be impacted as values fall to their lowest level for almost 20 years. On the other hand, those using their transfer to secure benefits in alternative arrangements, for example annuities, will see marked improvements which may offset some or all of the fall.”

DB pension transfer activity remained low for the second month in a row with 38 members out of every 10,000 having transferred their pension.

In addition, the number of transfer cases raising at least one scam warning flag rose slightly over the month to equal the previously recorded high of 97 per cent, according to XPS’s Scam Flag Index. 

The September data covers close to 400 transfers, and the majority of these members are being referred to MoneyHelper for a safeguarding call.

Market turbulence

The initial cause of bond prices dropping was the raft of tax cuts announced by former chancellor Kwasi Kwarteng in his “mini” Budget last month, which was announced without an economic forecast from the Office for Budget Responsibility.

The high yields triggered margin calls for certain pension funds which used liability-driven investments, a form of derivative used to hedge against rising inflation and interest rates.

These funds were forced to sell liquid assets to meet these calls, some of which were gilts, which drove yields up further.

The BoE eventually intervened, pausing its own gilt-selling programme and initiating a gilt-purchasing programme, which was then expanded to include index-linked gilts.

This morning (October 24) gilts and sterling rallied on the news that Boris Johnson had withdrawn from the race to become the next prime minister.

The 10-year gilt yield has continued to fall, reaching 3.84 per cent earlier this morning.

Immediately following the "mini" Budget, the yield on a 10-year gilt reached 4.38 per cent.

amy.austin@ft.com