Stampede to cash in ‘gold plated’ final salary company pensions

Ex-pensions minister and FTSE 100 executives among those lured by record transfer offers

A former pensions minister and FTSE 100 executives have joined a stampede of savers cashing in “gold plated” final salary company pensions after transfer offers reached record highs this year.

Financial advisers say that in recent months, hundreds of millions of pounds have been paid to members of final salary schemes who have not yet retired but opted to swap their future pension for a cash lump sum today.

Final salary, or defined benefit, pensions are considered gold plated because they promise to pay a secure, index-linked income for life, based on final or career-average salary. Most workers today are offered defined contribution pensions, where there is far less certainty over what income they will receive in retirement.

But while financial advisers warn that final salary pensions retain highly valuable benefits worth keeping for most savers, thousands have been tempted by cash transfer offers made by schemes. These climbed to record highs after the June Brexit vote as bond yields plunged. Transfer values have typically been offered at multiples of 30 to 40 times the projected annual pension income — and up to 50 times in some cases — achieving sums of up to several million pounds for individuals on high salaries.

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The trend has been driven by low yields on government bonds, which increase the cost to pension schemes of pensions either as an income or as an upfront lump sum. Paying out cash reduces a scheme’s future liabilities. With gilt yields edging up again, the big transfer values offered in recent months may have peaked.

LCP, an actuarial firm, said the average transfer value it quoted in the third quarter of this year jumped by 25 per cent on the previous quarter to ￡368,000.

JLT Employee Benefits, which administers defined benefit schemes, said it has paid a record ￡32.5m per month in defined benefit transfers this year, up 50 per cent on 2015 levels.

Willis Towers Watson said that, in the defined benefit schemes it administered, nearly five times as many members transferred out between April 2015 and October 2016 compared with the same period in 2013-2014.

Baroness Altmann, the former pensions minister, told the Financial Times that she recently decided to cash in two of her final salary pensions after transfer quotes for both doubled over a two-year period from 2014 to 2016.

“The sums were attractive to me and it was hard to imagine the offers going any higher,” said Baroness Altmann, who stepped down as pensions minister in July. 

Others cashing in included a dozen long-serving executives in one FTSE 100 company in a transfer totalling ￡30m, according to Hymans Robertson, an actuarial firm. Martin Wolf, the FT’s chief economic commentator, has also announced he has cashed in.

Baroness Altmann said her decision was driven by attractive cash equivalent transfer values and new freedoms for personal pensions, which made defined contribution pensions far more user-friendly than before. Those who take a cash transfer have to first put it in another pension product such as a self-invested personal pension, or QROPS.

Individuals give up the security of a guaranteed income for life — assuming their company scheme remains viable — usually index-linked. But they gain control over the investment and drawdown of their capital and, under recent pension reforms, can pass on any surplus to their family tax free if they die before age 75.

“I don’t mind giving up some final salary, guaranteed pension income in exchange for what seems a very good-value offer,” said Baroness Altmann. “And these DB pensions were built in the 1980s, before inflation-linking was added, so they are not inflation-linked.”

In Baroness Altmann’s case, one offer increased from ￡108,000 to ￡232,000 and the other from ￡57,000 to ￡104,000. Transfer offers rose sharply in September because they are typically priced in relation to movements in gilt yields. Offers reached record highs as yields fell to historic lows after the EU referendum.

Martin Wolf said in an article for FT Money: “At current ultra-low interest rates, the transfer value of a defined benefit pension has become significantly overvalued. It seems sensible to take advantage of that fact. I have done so.”

He went on: “Could that be the wrong decision? Yes. But I would have to live to be close to a hundred and the pre-tax real returns on investments would have to be zero — or less — over decades. If the latter were to be true, capitalism would truly be dead.”

The FTSE 100 company executives “had been speaking to each other and were aware of the high transfer offers”, said Jon Hatchett, partner with Hymans Robertson. “These executives cashing in would have reduced the scheme deficit by millions.”

The dash for cash comes as the OECD recently warned that savers in the UK were at greater risk of running out of money in later life if they continued to turn their backs on a secure retirement income, such as an annuity.

“Ultimately the decision as to whether or not to transfer out of a defined benefit pension scheme remains complex,” said Gary Smith, financial planner with Tilney Bestinvest, an independent financial adviser.

“It often remains in the individual’s best interest to remain in the scheme, in spite of the high transfer values offered.”

The urgency of the decision over cashing in may ease for many, with most experts agreeing that transfer offers were now about 8-10 per cent off the peak values seen in September, though they remain high historically. 

“We agree that offers have probably peaked for the time being,” said James Baxter, partner with Tideway Wealth, which is expecting to complete a record ￡40m in transfers this month.

“Only time will tell whether there really has been an end to the long term bull market in bonds. But for the time being Donald Trump and a strengthening economy in the US, and to a lesser extent the UK, have sent gilt yields higher and this will feed into lower transfer offers in the coming months.”

The flood of transfer requests helps alleviate the “pension problem” for schemes struggling with large deficits, though experts cautioned that this year’s transfer volumes had not yet made a significant dent in liabilities.

“While transfers in 2016 are up 50 per cent on last year, this will probably have had only a small impact on pension scheme liabilities,” said Charles Cowling, director at JLT Employee Benefits.

“At less than ￡1bn [in transfers this year] this is a drop in the ocean against the total defined benefit liabilities in the UK which increased more than ￡300bn in the past 12 months. But the impact will vary across pension schemes,” he said.