FT: pension transfer 'stampede'
The FT's parting gift to readers in 2016 is a strong hint in two articles in today's paper to take advantage of high cash transfer values from UK DB schemes - following the example of its own Martin Wolff and even former pension minister Baroness Altman - while stocks last.
As we've commented many times, QE is alone responsible for the exceptionally favourable odds of beating a Rolls Royce of a pension (partially inflation proofed, longevity-insured, backed up by a mutual protection fund) when investing the cash transfer amount in a personal pension (taking on all of the capital-market, inflation and longevity risk). This is not a feature of a normally-functioning free-market economy and since my first involvement with pensions management in the 1970s I have never seen such a situation. As a firm, we have the FCA permissions to advise on transfers but have rarely seen an economic advantage and then only for idiosyncratic rather than general reasons.
It took two non-normal conditions to make the starting position one where a transfer is likely to be in a DB member's best interests. First, changes in pension regulation that made it close to irrational for DB schemes to hold investments that did not match (along the way and in terms of outcomes) the accounting measure of their liabilities - so ILGs, conventional gils and corporate bonds rather than equities. Second, the experiment in Quantitative Easing that drove the real yields on the liability-matching assets down to levels so low that nobody except 'forced' buyers would want to hold them. Generally, the more a fund has derisked into liability-hedged assets the higher the transfer value and the better the odds of beating the sustainable real income, even without considering any idiosyncratic factors that may apply.
In her article, FT pension writer Jo Cumbo suggests this is an opportunity that will not last. We agree. We would have preferred to have seen it given more space in the FT at an earlier point rather than when yields are actually rising. But it's human nature that those in a position to act are more likely to do so when they see the terms moving against them rather than when the terms might actually improve even further.
We hope in 2017 that the FT will give more coverage to discussion of the sanity of both conditions: QE and pension regulation.