In the last decade we have seen huge numbers of people transfer out of their Final Salary Pension Scheme mainly as a response to soaring pension transfer values over the last few years. Low interest rates meant that DB pension schemes where expensive to finance which meant we saw very high transfer values offered to those willing to leave the scheme.
However, Defined Benefit Pension providers are experiencing a decline in transfer business due to a drop in CETV values, meaning members are questioning whether to switch their DB pot to a contribution scheme.
Inflation is at an all-time high, along with one of the worst cost of living crises we have seen in UK history, throw in an energy crisis and it makes sense that people will be studying their finances to try and find a way to support them through these difficult times. However, with interest rates rising from 0.1% to 2.25% by the Bank Of England, we are seeing a steep decline in the transfer values offered by DB pension schemes.
CETV’s are closing linked to the value of gilt yields, which in turn are influenced by changes in interest rates. Gilt yields are a factor in the calculations which a scheme actuary will carry out to provide a CETV. When interest rates are low, gilt values are high because the rate of interest gilts pay is likely to be higher than interest paid in a deposit account with a bank, therefore increasing demand of gilts. In contrast to this, when interest rates rise, gilt values will most likely fall.
Pension trustees manage pension funds and guarantee members’ pension income, which is adjusted for inflation, and paid for life. UK inflation rates are at a 40 year high and are expected to climb further pushing up the cost of providing pensions.
Now, pension trustees’ first priority is securing the health of the pension scheme for its active members. As scheme costs rise, it makes sense that they would seek to discourage people from transferring out by offering falling CETVs.
As well as interest rates, another factor affecting the transfer values, is member longevity. It could be that the long term impact on life expectancy due to the covid-19 pandemic and related health crises could also play a part in reducing transfer values.
It is clear that Pensions Administration systems will continue to be needed for DB Schemes for some time to come and our system has the flexibility and durability to support these schemes throughout their lifetime. We have the experience of migrating, installing and supporting both DB and Hybrid Schemes for many many years. If you would like to hear or see more, contact us at sales@lpsystems.com