The biggest determinate of transfer values is UK bond yields. The lower these go the higher the transfer value of pensions go. With COVID-19 spooking the markets investors have piled into bonds. This investment has driven bond yields down to a point where they are lower than at the height of Brexit uncertainty.
The falling bond yields will cause a surge in pension transfer values, taking them above the highs seen in 2019. The easiest way to think about the relationship is that final salary pension values move like house prices, the lower interest rates go the higher the values become. This happens for pensions because when someone retires the pension scheme has to have safe assets that will provide an income for life. If the interest rates (yields) that they get from those assets falls then they need more assets to provide the income for life. A transfer value works out the level of assets that would be needed to provide you your guaranteed income.
Workplace pensions likely to drop deeper into the red
The PwC SkyVal pension index at the end of January saw the combined deficit of defined benefit pension funds climb a whopping £40 billion from £170 billion in December to £210 billion in January. The UK’s 5,450 DB schemes reported assets of £1,790 billion, compared with pension liabilities of £2,000 billion.
Since then the coronavirus has decimated share markets leading to likely falls in UK pension asset values, while at the same time inflating liabilities (transfer values) for these schemes. This will be placing increasing pressure on UK schemes to top up their funds from earnigs so they can meet their obligations to members.
UK schemes can now halt transfers
The Pensions Regulator (TPR) has publicly stated that over the next three months UK defined benefit schemes may suspend issuing transfer values and paying transfers out. Not issuing a transfer value or paying it is a breach of the Trustees duties and they must report the breach. However, the TPR has stated that they will not take any action against a scheme that breaches (read more). However, it is still at the individual schemes discretion as to what they do.
There have been calls for pension transfers to be halted in the UK for six months (read more). This is because of the unprecedented situation in the markets UK schemes could not be sure of the underlying value of their pension funds. With uncertain scheme funding positions there is a fear that some people may end up getting a better deal than others if they elect to transfer out of their pensions.
To be clear just because there are troubles in the UK does not mean that you should simply transfer your pension. That would be blind decision making. There are reasons to leave a UK pension in the UK and reasons for transferring it – there is no universal right or wrong answer. No two people or circumstance are the same, so you need to be sure you’ve made the right decision for your UK pension based on your personal circumstances.