The Transfer Values (TV) of many DB Pension schemes have increased materially in recent years, due mainly to this prolonged period of low interest rates.
Many market practitioners and actuaries might argue that we are currently at a ‘sweet spot’ for transfer values and with the threat of inflation creeping in daily to economic commentary, this period of historic low interest rates may be about to change.
Even a small incremental interest rate move upwards will negatively affect the value of DB Transfer Value.
The reason being that the discount factor used to calculate this settlement is linked to long dated bonds, which have been negative yielding for some time (which is good for a DB TV holder), but this may be about to change.
It must be remembered that with a Defined Benefit Pension scheme, the holder is made a promise by the employer (not a guarantee!), that a payment will be made to him/her at the scheme retirement date. The strength or not of this guarantee is based on an actuarial assessment of;
As a financial advisory firm, we are currently receiving increased enquiry levels from clients who have received recent TV offers and are finding it difficult to assess if these values offer a true reflection of their entitlement. As a general rule of thumb, if the current Transfer Value offered is in the region of 18-20x the annual DB payment (promise), then it is worth closer scrutiny.
Probably nothing at this point, provided you are comfortable with the Employer’s commitment to the pension scheme, i.e.it is well funded, or at least meeting its minimum Funding Standard (MFS), and the employer has demonstrated its commitment to the pension scheme.
The good news is that your DB Transfer Value could be expected to grow by circa 6% per annum up to age 55 years, and by circa 8% in the 7-8 years before the NRA. So, as you move closer to the normal retirement age of your DB Scheme, the TV should be expected to increase. Remember, even if you are happy with your promised DB payment, you cannot access this amount early until the scheme’s normal retirement date.
A Transfer Value gives you the opportunity from age 50 onwards to:
So, the great unknown as we write (June 2021) is, how long will interest rates remain low and will the abundance of QE and cheap money in financial markets, affect inflation rates and pressure Central Banks to raise interest rates?
With government bond yields at historic lows have increased the quantum of transfer values in recent times, as the discounted rates used in these calculations are linked to these low, sometimes negative, yielding government bonds. With inflation expectations now gaining momentum, now is timely for DB Pension holders to review their transfer value offers.
It would difficult to move interest rates lower than they are at present so we see this as highly unlikely. We see there being a greater probability that pension transfer rates will rise, which would have the inverse effect on Defined Benefit transfer values.
If you would like to hear more detail on the options available to you and to discuss your transfer values, please don’t hesitate to get in touch.