A financial services company has reduced its pension liabilities by a tenth, or more than £100m, in just six months in a dramatic example of British workers increasingly leaping at the offer to cash in their final salary benefits.
Liabilities on the unnamed company’s £1.5bn defined benefit pension scheme fell at a pace not seen before in a UK company, according to Aon, the pension consultancy.
The revelation comes as companies sponsoring traditional “final salary” pension schemes report record levels of requests from members looking to cash in their pension benefits.
At the same time, the Pensions Regulator is taking a keener interest in the advice given to those making such transfers, prompted by concerns about the mis-selling of financial products.
Defined benefit pensions pay a secure income for life, typically rising with inflation. But non-retired members are being tempted by high offers from schemes to trade their future pensions for a lump sum today.
Aon, which administers pensions for 1m members in 205 defined-benefit schemes, said the number of pension transfers had increased six-fold since 2014, the last year before pension rules were relaxed to give savers more flexibility over how they spend their funds.
“There’s been an increased awareness among members of the high transfers being offered,” said Ben Roe, partner with Aon Hewitt. “For example, we have seen a 15-times increase in the number of transfer offers made in excess of £500,000, particularly to members aged over 55.”
Mr Roe said the banks and insurers were seeing the highest levels of pension outflows. “We typically find that pension schemes in this sector are better funded than average, and all else being equal, this tends to lead to higher transfer values,” said Mr Roe.
Around 80,000 defined benefit transfers took place over the year to the end of March, according to the Pension Regulator, with some forecasting this figure will rise further if trustees begin to promote more widely the option to transfer.
Transfer offers are being a encouraged by low gilt yields, which have the effect of inflating the cost of future pension promises. That, in turn, means higher sums offered to those removing their share of pension risk today from the scheme.
Increased transfer activity has taken place against the backdrop of stubbornly high pension deficits for the majority of the UK’s 5,800 private sector defined benefit schemes, which face a combined funding shortfall of around £510bn.
Consultants said some companies were using transfer exercises as a cheaper way of reducing pension risk rather than offloading the scheme to an insurance company through a “buy out”.
“For those companies who have got an end game mapped out it is far more efficient to encourage transfers than it is to buy out the benefits,” said Charles Cowling, partner with JLT Benefits.
The Pension Regulator’s current advice to members is that most are better suited to keeping a defined benefit pension, given the guaranteed benefits it provides to the member, spouses and dependants.
The sharp uptick in transfer activity has coincided with increased interventions by the regulator, which in recent months has removed advice permissions from several firms operating in the pension transfer market.
“It is important advisers continue to assess each case on its own merits as defined benefit transfers will not be suitable for all clients,” said Old Mutual Wealth, a wealth manager.