Defined Benefits Scheme – Why is the transfer value high?

Members of defined benefit schemes have the right to a transfer value, known as a cash equivalent transfer value, every 12 months from the scheme administrator.

The transfer value is based on many factors; your benefits in the scheme, age, investment returns, inflation and other factors such as life expectancy. The main part of the calculation behind the transfer value that has changed though, is Government gilt yields.

The liabilities of defined benefit pension schemes, i.e. the pension payments it needs to make both now and in the future, are underpinned by yields on Government gilts.

Gilts are bonds issued by the UK Government to raise finance. The rate of interest the Government pays on the bonds is fixed, but the price varies due to demand. The yield is the rate the Government pays on the bond divided by the current market price. The yield therefore fluctuates as the price of the Bond changes, the higher the price the lower the yield.

As Gilts are backed by the UK Government they are perceived as “safe assets”. With UK Interest rates at an all-time low, there has been a large increase in demand for gilts as investors seek returns. Other factors such as quantitative easing and concerns over Brexit have also significantly increased the demand for gilts. The result? Yields on UK Government gilts are at an all-time low.

The direct result for the actuaries of defined benefit schemes is that they need more funds held as Government gilts to secure the scheme liabilities. In turn, this leads to an increase in transfer values as seen on recent annual statements.

If you would like to find out more information please contact Gareth Rose at grose@sedulo.co.uk or call 0161 236 9077

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