Final salary pension schemes promise to pay benefits into the future (their liabilities). To pay for those benefits they invest money (their assets). Recently we have seen a drop in financial markets that has spooked investors. Final salary schemes are not immune to these falling markets and the value of their assets has fallen. However, at the same time, the value of their liabilities (what they owe to the members) has fallen even quicker. How has this happened? Because the calculations of the value of the liabilities are based on mathematical equations and one of the key inputs is UK interest rates. Basically, the higher the interest rates the lower the amount of money that a scheme needs to have in the pot to pay your pensions (because they can earn more in interest each year) and therefore the lower their liabilities.
The Pension Protection Fund (PPF), a UK government body responsible for protecting final salary pensions, records the assets and liabilities of the over 5,000 UK final salary schemes. The results of their analysis, shown in the diagram below, show a marked fall in the value of schemes’ liabilities.
Why should I care? I will still get the same pension
Yes, if you intend to take your UK final salary as a pension all these movements in interest rates are of little interest to you. However, if you intend to transfer your UK pension you would care as the schemes essentially owe you a little bit of their liabilities. And if the value of their liabilities is dropping the amount that they owe you is falling too – meaning your pension transfer valuation will be falling.
So far to date, the fall in asset values has not been as great, so that might provide some protection for your transfer value, but it will depend on your individual scheme and their valuation methodology.
You need to understand the relationship between your pension transfer value and the annual pension that your scheme offers. We recommend that anyone looking at their UK defined benefit scheme seeks professional advice as it is a complex area. If you have any questions please do not hesitate to contact us.