The result of the EU referendum on 23 June 2016 was a surprise for many of us. It was difficult to predict the detrimental impact on gilt yields which occurred in the weeks following the result! With many UK pension schemes invested in gilts, the historically low gilt yields which resulted has led to pension schemes being faced with significantly higher liabilities. Transfer values for deferred members of DB schemes have also increased. A transfer value is a best estimate of the cost of providing the benefits to the member in the scheme and these too are calculated with reference to gilt yields.
Trustees may be concerned if their scheme experiences an increase in transfer value requests post Brexit. Trustees are ultimately responsible for the security of benefits of ALL members- those who wish to transfer and those who remain in the scheme. At this time, when pension schemes are battling increasing deficits, paying out large transfer values could have a serious impact on the security of benefits for those members who remain in the scheme, especially if transfer values do not reflect underfunding in the scheme. Trustees may therefore wish to consider reducing transfer values to reflect any underfunding. Trustees should remain cautious as there is potential for members to select against the scheme when taking transfer values.
As transfer value bases are a best estimate, schemes may see an improvement in their ongoing and solvency funding levels. Also, the transfer value amount paid out to a member from scheme assets is likely to be lower than the liability associated with the member on an accounting basis. Some employers may therefore see an improvement in their accounting position, although this is not guaranteed. Employers may even consider incentive exercises which encourage members to transfer out in an attempt to manage liabilities. Of course employers should consult with the trustees in such cases and the Code of Good Practice for Incentivised Exercises should be referred to.
Deferred members, who are aware of the impact that the current market conditions have on their benefits, may be more inclined to request a transfer value now and take advantage of the higher amounts payable. Members are encouraged to take Independent Financial Advice (and in certain circumstances are obliged to) before deciding whether or not to transfer out of their DB scheme. Although higher transfer values will be attractive to some members, this does not automatically mean it is in a member’s best interest to transfer out.