UK defined benefit, final salary pension transfer values are sinking faster than markets.
Each month XPS, a large UK pensions administrator, produces its Transfer Value Index. The index is the estimated cash Transfer Value of a 64-year-old member with a pension of £10,000 a year with typical inflationary increases. The value changes over time with market movements.
XPS’s latest Transfer Value Index shows a 25% drop in the estimated transfer value of defined benefit pensions over the last 6 months. That means a member wanting to transfer out of a scheme now is likely to receive 25% less for the same pension than they would have in December 2021.
The index also shows transfer values are at their lowest point in 4 years even lower than the initial shock in valuations caused at the start of COVID. Interestingly the drop in transfer values is happening in an environment of large inflation increases in the UK which would see underlying pensions indexed up. Therefore, the impact of rising interest rates on defined benefit transfer values is marked. With economists forecasting further interest rate rises in the UK in an attempt to tame inflation further drops in transfer values should be expected.
While the drop in final salary pension transfer values has been startling it does mirror recent falls in global share and bond markets. However, the magnitude of the fall is greater over the four-year period of the XPS index when compared with, say, the Dow Jones Industrial (DJI) index, as the DJI is still net positive over the four-year period.
Is it time to get a strategic cash equivalent transfer value?
For people worried about interest rates increasing further and the impact of that on their UK pension values you can get a cash equivalent transfer value which is valid for three months. This means from the date that you receive your transfer value you have three months to decide on a transfer. If in that time interest rates jump significantly you know that you will have locked in a transfer value that might have fallen subsequently.