Several of the economic forecasts published recently by the Office for Budget Responsibility (OBR) made for uncomfortable reading.
believes that unemployment could rise beyond 8.5% as struggling businesses fall into administration or cut staff numbers in an effort to survive. As the list of insolvent employers continues to grow at an alarming rate, economists estimate that around 15% of 9.4 million furloughed staff (1.4 million people) could lose their jobs before year-end; in such circumstances, unemployment would soar to 11.9%, matching levels last seen during the depths of the 1980s recession.
Given prevailing circumstances, it is no surprise to learn of a surge in requests from concerned employees for cash equivalent transfer values (CETV) relating to their defined benefit (DB) pensions.
Average cash values offered for DB pensions have soared by more than 11% over the past two years, primarily because in a protracted, low interest environment, an increasing number of DB pension sponsors / employers are finding it difficult to maintain their commitment to pay final salary pensions when their employees retire.
On the demand side of the DB equation, many employees harbouring solvency concerns about a sponsoring employer are conscious that their pension contributions are not typically invested in an external pension scheme, which means the retirement income they’re likely to be offered has little bearing on how contributions have performed over time.
Moreover, in the event an employer enters administration, the probability of there being sufficient funds to cover its DB pension liabilities is usually low at best. In such instances, the Pensions Protection Fund (PFF) will ensure that employees receive a pension as promised, though often at a lower rate than they could have previously expected.
Fortunately, transferring a final salary pension into one of the broad range of SIPPs offered by Options alleviates employer solvency concerns and provides beneficiaries with greater flexibility in terms of investment range and access, as well as beneficial tax treatment.*
Before a DB pension may be transferred, its beneficiary must take independent pension advice. Advisers will take the pension’s CETV** into account to determine critical yields and assess the benefits the DB beneficiary could be sacrificing. Ordinarily, the sponsoring employer will meet the costs associated with this exercise, though not all do.
As pandemic-instigated concerns over the commercial viability of thousands of companies continue to grow, it seems likely that the estimated 60,000 DB scheme members who transferred their pensions last year will continue to be joined by significant numbers of concerned employees anxious to protect their future pension benefits in an Options-administered SIPP.
*Options currently administers various forms of SIPP: Smart, Simple, Property, Group & Sharia
**The minimum value of a DB pension scheduled for transfer to an Options-administered SIPP is £40,000.
Professional advice essential element in transfer process
Options Pensions operate an in-house professional employee benefits consultancy well versed in establishing the technical feasibility of DB pension transfers in addition to exploring alternatives on behalf of employers and professional trustees of DB schemes.
In our experience, demand for transfers comes from beneficiaries / members with pensions of all sizes although over the last few years, as gilt yields have tumbled and cash equivalent transfer values risen, demand has been greatest from those with CETVs in excess of £500,000.
We believe this is because firstly, members with reasonably generous pensions probably assume they have sufficient retirement income on which to live and, as a consequence, can afford to access a proportion of their pension by transferring to a DC scheme.
Second, many of those with substantial CETVs prefer to leave at least a proportion of their pension fund invested, making it a de facto inheritance for their family.
Demand for DB pension transfers is likely to remain buoyant as gilt yields stay depressed, although ultimately the decision whether to remain in a DB scheme or transfer out will depend upon each individual’s personal circumstances, effectively creating corresponding demand for independent financial advice.