UK pensions…Returning to normal? Then along comes Coronavirus

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The amount that companies would offer as a transfer value for a £10,000 annual pension rose from £238,800 at the end of 2019 to £245,800 by January 31 2020. While this was still off the highs of 2019 it was a reversing of a downward trend.

In addition, the number of transfers (measured by the XPS Transfer Activity Index) has been rising for the past few months. Helen Ross, Head of Member Options, XPS Pensions Group said: “The marked increase in transfer activity is likely due to the elimination of some of the political uncertainty plaguing the markets over the last year, which may have been putting members off making big financial decisions.

Source: https://www.xpsgroup.com/news-and-views/transfer-values-regain-lost-ground-in-january/

Coronavirus changes the picture in a month


The biggest determinate of transfer values is UK bond yields.  The lower these go the higher the transfer value of pensions go.  The Coronavirus news spooking the markets has driven bond yields down in the UK back to the point they were at during the height of Brexit uncertainty.  Based on falling bond yields we would expect to see transfer values reverting to the highs seen last year (as shown in the above XPS graph).

Source: https://www.marketwatch.com/investing/bond/tmbmkgb-15y?countrycode=bx

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 earnings so they can meet their obligations to members.

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