One of a regular stream of posts written for Dubai based pensions specialist PWS Group. A consistent tone of expertise and authority, written in the company’s voice with an editorial style. Blog post for PWS Group.
Low Gilt Yields Means High Transfer Values.
Guilt yields are low.
As a result, the transfer values available to those considering switching their pension investments from employer-based ‘defined benefit’ pension schemes into personal pension arrangements are high.
This is, however, a moment in time; a coincidence of events. It’s most unlikely to last. So the message for anyone wanting to take advantage and maximise the transfer value they receive for their pension investment is, “Don’t delay. Decisive action is called for.”
How transfer values look right now.
A ‘defined benefit transfer value’ is the sum of money that a pension scheme would transfer to another pension arrangement in respect of the defined benefits built up by a member and to which they are entitled once they reach pensionable age, typically 65.
The industry benchmarks transfer values as the sum the pension provider would transfer out to a member aged 64 for every £10,000 of annual pension entitlement that member was entitled to from the age of 65.
Across late Spring of this year, according to the Xafinity Transfer Value Index, which monitors transfer values, the value reached a highly attractive £241,000 per £10,000 of annual benefit entitlement.
“In May 2017 we have seen a continuation in the volatility of transfer values experienced in April,” says Sankar Mahalingham, Director, Xafinity. “This month it has been caused mainly by variation in gilt yields.”
Why gilt yields affect transfer values.
Before Britain voted, on 23 June 2016, to leave the EU, the transfer value stood at £210,000 for every £10,000 of annual pension benefit.
But once Mrs May took over as PM and indicated that she would trigger Article 50 at the end of January 2017, gilt yields began to fall.
During May 2017, gilt yields dipped below 1% for only the second time in history.
So why does this affect pension transfer values?
Bilal Mughal, Regional Partner here at PWS Group, explains: “The investment return assumptions that pension providers use for scheme funding are typically related to the yield on long term gilts. Ignoring any other effects, a reduction in gilt yields will increase the size of the liabilities for a typical pension scheme, and hence lead to larger deficits.
And here’s the crux.
Transfer values are reached by using the same assumed rate of annual return to calculate the amount of capital that savers will need to attain an equivalent annual pension to that which they would get in a final salary scheme.
So if returns are low, the amount of capital needed for investment needs to be greater, creating the large transfer values available now.
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