Monitoring crucial as transfer requests could creep up

Analysis of the pension fund clients of consultancy LCP showed a stabilisation in the number of transfer requests, after a significant spike in 2014 driven by the introduction of freedom and choice.

But the data are yet to reveal the number of quotations proceeding to payment, and some professionals said the low interest environment could push the overall level of quotations higher.

Last month, consultancy Xafinity’s Transfer Value Index reached an all-time high of £227,500 for a member aged 64 who is currently entitled to a pension of £10,000 each year starting at age 65, up £2,000 on the month before.

Transfer values in effect cash in future investment returns you haven’t had yet

Calum Cooper, Hymans Robertson

Claire Jones, senior consultant at LCP, said the most recent data did not yet show an increase in requests, but said this could change.

“I think it’s quite plausible that there will be an increase in the number of quotations as people become aware that transfer values have typically increased as a result of recent market movements, but of course it takes a bit of time for the word to filter out,” she said.

Members transferring out of schemes would remain in the minority, she said, but added: “I think what the increase in transfer values means is that the proportion of members for whom a transfer value away from a defined benefit scheme is attractive will increase.”

The average age of members requesting transfer quotations also increased markedly, something Jones put down to the fact that savers are only afforded flexibility under freedom and choice once they reach 55.

Is the transfer window open?

Fluctuations in transfer value estimates calculated from market trends would have little impact on the amounts offered by occupational schemes, according to Clive Gilchrist, deputy chair of professional trustee company Bestrustees.

“[Transfer values] don’t change that quickly. If it’s run by an insurance company then they will mark to market on a weekly or monthly basis, but for occupational schemes run in the normal way then all factors – commutation factors, transfer values and so on – are looked at after the actual valuation,” he said.

In practice, he added, the majority of members are not financially astute enough to consider transferring out of a scheme based on market conditions.

“People don’t actually think in terms of ‘gilt yields have gone down, therefore my transfer value has gone up’, that’s a level of sophistication which is beyond most members,” he said.

Nonetheless, he said there was a growing trend towards providing members with estimated transfer values, to allow them to make their own financial decisions.

LCP’s study showed that 30 per cent of the firm's clients “are providing illustrative transfer values in retirement packs; all the rest are describing the option without providing a figure.”

Keep an eye on liquidity

Deciding whether or not to provide transfer value estimates is a “philosophical point”, which balances the fiduciary duty of trustees to seek the best outcomes for members with the right of members to access relevant information, according to Calum Cooper, head of trustee consulting at Hymans Robertson.

But he said significant outflows could mean poorly funded schemes discriminating between transferring members, who receive the full value of their accrued benefits, and staying members, whose benefits might be cut in the event of insolvency.

Last week Hymans Robertson revealed that the UK’s aggregate DB deficit has passed £1tn on a full buyout basis, placing further stress on schemes.

“Transfer values in effect cash in future investment returns you haven’t had yet, so it reduces the time horizon,” said Cooper, warning that schemes need “more time to heal financially” and should not encourage mass transfers.

Arguing against the point that members do not take into account market conditions, he said: “Because of the backdrop of the deficits and the insolvencies of large companies, individuals are more likely to be interested in taking a transfer.”

He suggested schemes should monitor the level of transfer quotations requested both at present and historically to identify trends, and manage liquidity in their investment portfolios.

“If a lot of people suddenly want to transfer out you might have to sell assets if your assets haven’t performed well recently, then you can start to see capital losses. So having a really good cash flow management plan [...] is important as well.”