Big UK companies have been moaning about staff pensions for years. Low interest rates have inflated the liabilities and funding costs of old defined benefit schemes. Now the hearts of finance directors have been gladdened by a trade-off: a stampede by members to swap guaranteed pensions for fat transfer payments. In just six months, one unnamed financial services group has shed liabilities of £100m, a tenth of its total, according to Aon Hewitt, a pension consultancy.
Aon believes the expertise of financial types inclines them to quit legacy workplace schemes. The yield on 10-year gilts, a benchmark for low-risk returns, is a rock bottom 1.06 per cent. That means transfer values to a personal plan may be 30 times more than the annual pension the workplace scheme would eventually pay. Such bounty may not recur.
Moreover, transferees can dip into the nest egg from age 55 and leave the unspent balance in their will. They shoulder investment risk. But they dodge the danger of the employer going bust, as store chain BHS famously did, which could result in lower benefits from an industry-funded relief fund.
Employers are keen for scheme members to understand the potential advantages, sometimes subsidising financial advice sessions. They could have an ulterior motive. Transfer values are high. But they are sometimes “best estimates”, which may be less than the accounting liability, which must be “prudent”. As a result, big transfer campaigns may helpfully shrink anticipated costs, bolstering forecast profits.
A mis-selling scandal may ensue if transfers are promoted too forcefully. Hymans Robertson, a benefits consultancy, warns of similarities with alleged mis-sales of annuities. Parallels may be teased from any number of controversies. These now define recent eras in UK retail finance in the way monarchs’ reigns subdivide the distant past. A new disaster is always coming down the track.
Lex values readers’ views. Is it right to take a fat transfer and give up a guaranteed pension? Could transfer campaigns rebound on big employers? Please tell us what you think in the comments section below.