There has been a 17% hike in the amount of money flowing out of FTSE 350 companies’ defined benefit (DB) pension schemes in the past year, largely down to an increase in transfers to defined contribution (DC) schemes following the introduction of new rules, according to analysis from Willis Towers Watson
The firm says 101 companies with DB pension schemes and 31 December reporting dates were in the FTSE 350 index in both 2015 and 2016. Total payments from these schemes increased from £20bn in 2015 to almost £23.5bn in 2016. A quarter of employers reported that payments rose by at least 25% year-on-year.
Willis Towers Watson says that transfer activity is not the only explanation for the 17% rise in benefit payments, but it is likely to have been the major factor.
Charles Rodgers, a senior consultant at Willis Towers Watson, said: ‘In our experience, the number of people transferring was almost twice as high in 2016 as in 2015, and members with bigger pensions have been disproportionately likely to transfer.’
Rodgers pointed out that lower interest rates have pushed up transfer values, and suggested that the offer of sums equivalent to 25, 30 or occasionally even 40 times the annual pension have proved tempting to members.
‘Recently, the number of transfers has been running at about 10 times the level seen before “pension freedom” was announced; if this continues, next year’s company accounts should tell a more dramatic story,’ Rodgers said.
The firm suggests transfer rates can also be much higher where employers pay for independent financial advice. Previous Willis Towers Watson research found that 31% of members over 55 whose employers offered to do this had chosen to transfer out in 2016/17.
Rodgers said: ‘Transfers at older ages can see members get more than the accounting liability that is extinguished, with a small negative impact on company balance sheets; this will happen where the discount rate used to calculate the transfer value is lower than the corporate bond yields prescribed by accounting standards.
‘In these cases, the deficits disclosed to investors would go up if companies started assuming that large numbers of people will in future transfer out shortly before retirement. However, this is not universal: transfers can be beneficial to some employers’ accounting numbers.’
Rodgers said employers who are concerned about this could encourage trustees to review how transfer values are calculated, though a less generous transfer value basis would make it harder for financial advisers to recommend that the member transfers.
‘For most employers, any accounting strain will be less important than the opportunity to reduce risk and to get pension obligations off their books at a much lower cost than an insurer would charge,’ he said.
