U.K. pension deficits fell to the lowest level since the end of 2015, dropping 10 percent in June as yields on government bonds rebounded. The gap between the assets and obligations of U.K. defined-benefit pension plans dropped to June 30, 2017, according to the latest PricewaterhouseCoopers LLP’s Skyval Index. The index tracks around 6,000 defined benefit schemes in the U.K.
The quickly shrinking gap highlights the extreme sensitivity of UK defined benefit pension valuations to bond yields. Steven Dicker, chief actuary at PricewaterhouseCoopers states that this “continues to illustrate the sensitivity of this type of deficit calculation to even modest market movements. With continuing political and economic uncertainty continues, deficits calculated on this basis are likely to remain volatile.”
The extreme volatility at present demonstrates the need to get the right advice on any final salary pension transfer and exactly how clients might be able to play their pension transfer values. The fact that deficits can move by 10% in a month yet final salary pension transfer values are guaranteed for three months shows an area where value can be exploited. Indeed, if factors move in your favour during the three month guarantee period you would be better off requesting a new pension transfer value. However, if factors moved against you, you can rest assured in the knowledge that your pension transfer value is guaranteed.
It is therefore critical to understand, or have an adviser, that understands the interplay between bond yields and your UK pension transfer value and can exploit the movements in your favour should that be required.