Money flowing out of FTSE350 companies’ defined benefit pension schemes rose by 17% in 2016, according to Willis Towers Watson’s analysis of company accounts.
Pension fund members are increasingly transferring their defined benefit pensions to other arrangements due to worries that underfunding could reduce their benefits.
Willis Towers Watson believes that a spike in the number of members transferring to defined contribution schemes explains the increase, though published accounts do not separate transfers from regular pension payments and tax-free lump sums at retirement.
Some 101 companies with defined benefit pension schemes and 31 December reporting dates were in the FTSE350 index in both 2015 and 2016. Total payments from these schemes increased from £20billion in 2015 to almost £23.5billion in 2016. One quarter of employers reported that payments rose by at least 25% year-on-year.
Charles Rodgers, a senior consultant at Willis Towers Watson, said: “In our experience, the number of people transferring was almost twice as high in 2016 as in 2015, and members with bigger pensions have been disproportionately likely to transfer.
However, the real surge did not come until late 2016/early 2017, so will not be fully reflected in 2016 accounts. Recently, the number of transfers has been running at about 10 times the level seen before ‘pension freedom’ was announced; if this continues, next year’s company accounts should tell a more dramatic story. Lower interest rates have pushed up transfer values. Sums equivalent to 25, 30 or occasionally even 40 times the annual pension have proved tempting to members.”
Towers Watson said that pensions rise with inflation every year and the pensioner population is growing, so transfer activity is not the only explanation for the 17% rise in benefit payments, but it is likely to have been the major factor.
In most schemes, the number of transfers in 2016 will have been small in relation to the total membership, though some members who have stayed in the scheme so far will just be keeping their options open until they are closer to retirement. Transfer rates can also be much higher where employers pay for independent financial advice.
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