The DB Green Paper proposal to allow stressed schemes to reduce or suspend inflation increases could cut transfer values by up to 36 per cent, Xafinity has warned.
The consultancy says a scheme that currently increases pensions in payment in line with RPI that introduced an indefinite suspension of pension increases under the proposed new rules could see a transfer of £232,600 under the Xafinity Transfer Value Index calculation decrease to around £150,000. The index tracks the transfer value of a £10,000 a year inflation-protected DB benefit starting at age 65, to a 64-year-old.
A scheme that reduced inflation protection from RPI to CPI under any future stressed scheme reduction rules would see a 14 per cent cut in a transfer. Under this scenario, a transfer value calculated in the same way as the Xafinity Transfer Value Index might decrease from £232,600 as at the end of January 2017 to around £200,000.
The Green Paper floats the idea of allowing stressed schemes to either reduce the rate at which pensions increase in payment, or suspend entirely future increases, although it is yet to define what ‘stressed’ actually means.
Paul Darlow of Xafinity says: “For schemes that are not stressed, one would expect this proposal to have no impact on transfer values, since if those schemes are not allowed to change their pension increases, the value of the pension promise stays the same.
“For schemes that are stressed there could well be an impact on transfer values if the proposals are eventually enacted although the impact would depend heavily on exactly what was permitted.
“It could be argued that this potential change creates a ‘buy-now-while-stocks-last’ incentive for those considering transferring out, as they could get a lower transfer value in future. However, for anyone with in a scheme that is under strain, there is already the risk that if they do not act they could find themselves within the Pension Protection Fund, so that incentive already exists.
“And if a pension scheme was stressed it might not be paying full transfer values anyway. Legislation allows pension schemes to reduce transfer values in circumstances such as where the scheme is in deficit and the trustees are concerned about the strength of the employer. As such, the impact from scheme to scheme could well differ significantly.
“Furthermore, one would hope that many of the schemes that are stressed will eventually emerge from that stress. As such, any change in pension increases might only apply for a short period. If this were the case, the impact on transfer values could be less than has been outlined – the actuary / trustees would need to make a judgement on how long any stress might last, which would be a challenging task.”