In this blog, Jim Little discusses the impact of the Brexit referendum on transfer value activity in DB schemes and highlights some potential considerations for sponsors and trustees.
Following the Brexit referendum on 23 June 2016, UK government bond yields fell to record lows. For many UK defined benefit (DB) schemes this led to a significant rise in the transfer value amounts quoted to members who are considering trading in their DB pension for a cash sum. In some cases, members could see a transfer amount of an eye-watering 40 times the pension given up. This hike in transfer values has attracted the interest of the media and members alike, it is hard to remember another time in the 15 years I have worked in the pensions industry when it has been commonplace for friends and members of the general public to be discussing DB transfer values down the pub or over the table at a dinner party.
We have been analysing transfer activity across c.80 DB pension schemes with c.30,000 deferred members for the past three years and the most recent analysis for Q4 2016 showed the highest amount of activity so far, with transfer value quotation requests up 64% compared to the same period one year ago. So who is asking for these transfer quotations? You might expect the largest group to be those members who are able to take immediate income drawdown following transfer, and our analysis shows that to be true with 8% of deferred members over the age of 55 requesting transfer values in the 12 months to 31 December 2016 compared to 5% of members as a whole.
What has been interesting in recent months is that the media attention and word of mouth has sparked much greater interest in the under 50's cohort, so those members that cannot immediately start drawing their pension. Our analysis has shown that the number of transfer quotes from the under 50's rose sharply in Q4 2016, up 40% from the previous quarter and up 46% from the previous year. We wait with interest to see if this translates into more transfers paid out to this group.
Corporate sponsors of DB schemes may see this increase in interest from members as an unexpected and cost-efficient opportunity to de-risk a proportion of their pension liability, or perhaps re-visit a previously dismissed transfer value de-risking project. The numbers are material, with the average transfer value paid in 2016 being £485,000.
Some questions trustees may want to ask themselves are:
- Are the current factors used to calculate transfer values fit for purpose given the post Brexit changes?
- How is the option to transfer currently communicated to members both on retirement and before retirement and is it appropriate?
- Should we offer members the option of a partial DB transfer, so enabling them to retain some guaranteed income while also taking a transfer cash sum?
- Does the change in transfer activity have an impact on investment strategy?