The overall funds transferred out of defined benefit (DB) pensions in the last three months of 2019 reached just under £10bn ($12bn, €11bn), investment platform AJ Bell has revealed.
This was a steep increase from the £5bn transferred in the third quarter of last year, according to the Office for National Statistics (ONS).
But AJ Bell said that numbers are bound to vary significantly because they include “insurance buy-out” deals – where insurers pay members’ benefits for a cash payment – as well as people quitting DB schemes.
Tom Selby, senior analyst at AJ Bell, said: “The scale of individual DB transfer activity in recent years has been staggering, driven by a perfect storm of persistently low gilt yields, the greater flexibility in defined contribution (DC) schemes created by the 2015 pension freedoms, and uncertainty about the future of many companies sponsoring such schemes.
“This uncertainty has only been added to in recent months, as covid-19 has forced large swathes of the UK economy into stasis. As gilt yields have been driven ever lower, liabilities and deficits have surged, with the latest Pension Protection Fund (PPF) figures showing aggregate deficits had reached £176bn at the end of April.
“DB contributions designed to plug deficits – ‘deficit reduction contributions’ – sucked up 60% of all DB contributions in Q4 2019, highlighting the challenge many companies with yawning pension black holes faced as they entered this crisis.
“While the regulator has taken a pragmatic approach in relation to paying off deficits at a time when many companies are struggling to keep the lights on, the reality remains that, at some point, the pensions piper will need to be paid,” Selby warned.
“It is important to note that the ONS figures include both individual transfers and ‘buy-out’ deals where insurers agree to take on responsibility for paying members’ benefits in exchange for a cash payment,” Selby continued.
“This will mean the figures are likely to swing violently when particularly large buy-out details are agreed.
“The Financial Conduct Authority (FCA) recently announced a ban on ‘contingent charging’ in relation to individual DB transfers, while covid-19 has led The Pensions Regulator to issue guidance to DB trustees saying they won’t take action if they don’t produce transfer values or ‘CETVs’ due to uncertainty caused by the pandemic.
“In the short-term, both will likely make it more difficult for individuals to complete DB transfers, with the FCA action in particular posing challenges for those with large pension funds but limited income,” he added.