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Up to £50bn pulled from final salary pension plans since 2015

Up to £50bn pulled from final salary pension plans since 2015

Up to £50bn pulled from final salary pension plans since 2015
June 23
05:29 2017

Savers cashing in their final salary retirement funds helped shave up to £50bn off UK corporate pension liabilities in two years, according to new estimates.

Mercer, the professional services group, has calculated that about £50bn has been paid to 210,000 members of company-backed defined benefit pension plans since April 2015.

The estimates, prepared for the Financial Times, provide a snapshot of the aggregate corporate impact of 2015 changes which made cashing in so-called “gold-plated” defined benefit, or final salary, pensions more attractive.

The 2015 “pension freedoms”, which gave over-55s full flexibility to spend their defined contribution pension funds as they wished, with no requirement to buy an annuity, prompted demand from members to cash out of their DB plans, which pay a less flexible income for life.

But the dash for pension cash has also been spurred by record seven-figure transfer offers made by DB schemes to those giving up their future pension.

“The pace of the flow out of schemes has been dramatic,” said Deborah Cooper, partner with Mercer.

“This is a function of low interest rates making the transfer offers seem big but it is also a function of the pension freedoms.”

Ms Cooper said transfer activity was starting to dent pension risk at some of the UK’s 5,800 private-sector DB schemes, which have combined liabilities of about £1.7tn.

However, the impact is likely to be more acute in sectors seeing the highest outflows of pension cash, such as banks and insurers, according to Aon, the consultants.

The estimates from Mercer, which provides administration services to about 7 per cent of the DB market by numbers of schemes, were extrapolated from the number of transfer value payments Mercer has made on behalf of its administration clients since April 2015, up to end May 2017.

Mercer’s estimates are higher than those made by the UK Financial Conduct Authority which reckons about 80,000-100,000 advised pension DB transfers are taking place each year.

However, the Mercer figure also considered payments to scheme members cashing in benefits valued at less than £30,000 which may not have been included in the FCA figures.

The estimate followed FT reports of one financial services company reducing its overall pension liabilities by about a tenth, or more than £100m, in a six-month period because of increased transfer activity.

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.

Roslyn Williams, director and member options leader in PwC pension practice, said their clients were also experiencing a “significant increase” in demand for transfers from scheme membership.

“The value of transfers out is also becoming much more material to schemes, hence impacting on funding and investment decisions,” said Ms Williams.

“This is also forcing companies to understand the impact on their accounting disclosures whereas previously it may have been lost in rounding.”

“We’re also seeing greater interest from clients in running focused exercises to raise awareness of pensions freedoms. As long as members have access to good advice and choose to transfer out for the right reasons, then we see this as being a good thing for members and scheme sponsors alike.”

On Wednesday, the FCA published proposals to improve pension transfer advice and provide more protection for those before retirement considering giving up a defined benefit pension, which pays a guaranteed income calculated on salary and length of service.

It also proposed dropping guidance that financial advisers “should start from the assumption” that transferring money out of a DB pension will be unsuitable”.

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