• Almost £10 billion was transferred out of defined benefit (DB) pensions in the final quarter of 2019, up from just over £5 billion in the previous quarter, new ONS data suggests https://www.ons.gov.uk/economy/investmentspensionsandtrusts/articles/ukpensionsurveys/redevelopmentand2019results
• Numbers likely to vary significantly from quarter-to-quarter as they include insurance ‘buy-out’ deals as well as individuals quitting DB schemes
• Almost 60% of employer contributions to DB schemes sucked up by ‘deficit reduction contributions’ as UK entered lockdown
• Elsewhere in the data, automatic enrolment continues to boost pension savings levels in the UK, with employer contributions hitting £6.3 billion and employee contributions £14.1 billion
Tom Selby, senior analyst at AJ Bell, comments:
“The scale of individual DB transfer activity in recent years has been staggering, driven by a perfect storm of persistently low gilt yields, the greater flexibility in defined contribution schemes created by the 2015 pension freedoms and uncertainty about the future of many companies sponsoring such schemes.
“This uncertainty has only been added to in recent months as COVID-19 has forced large swathes of the UK economy into stasis. As gilt yields have been driven ever lower, liabilities and deficits have surged, with the latest Pension Protection Fund (PPF) figures showing aggregate deficits had reached £176 billion at the end of April.
“DB contributions designed to plug deficits (‘deficit reduction contributions’) sucked up 60% of all DB contributions in Q4 2019, highlighting the challenge many companies with yawning pension black holes faced as they entered this crisis.
“While the regulator has taken a pragmatic approach in relation to paying off deficits at a time when many companies are struggling to keep the lights on, the reality remains that, at some point, the pensions piper will need to be paid.”
Buy-out deals and regulatory action
“It is important to note that the ONS figures include both individual transfers and ‘buy-out’ deals where insurers agree to take on responsibility for paying members’ benefits in exchange for a cash payment. This will mean the figures are likely to swing violently when particularly large buy-out details are agreed.
“The FCA recently announced a ban on ‘contingent charging’ in relation to individual DB transfers, while COVID-19 has led the Pensions Regulator to issue guidance to DB trustees saying they won’t take action if they don’t produce transfer values or ‘CETVs’ due to uncertainty caused by the pandemic.
“In the short-term, both will likely make it more difficult for individuals to complete DB transfers, with the FCA action in particular posing challenges for those with large pension funds but limited income.”
Auto-enrolment continues to motor (although COVID-19 could stall contributions briefly)
“The data also sheds new light on automatic enrolment, with total contributions rising from around £15 billion in 2018 to over £20 billion in 2019.
“With the reforms encouraging employees to pay a bit more than employers (4% of relevant earnings contributed by employees versus 3% from employers for those enrolled at the legal minimum), it is no surprise to see this reflected in the aggregate numbers.
“The figures for 2020 will be inevitably be hit by COVID-19, primarily because around 8 million workers have been furloughed and therefore will likely have seen a reduction in their auto-enrolment contributions.
“This will only amount to a maximum of a few hundred pounds, however, and should represent a temporary blip rather than a new retirement crisis. As the UK hopefully begins to return to normality, political focus does need to shift towards building financial resilience across the system.
“This must include encouraging people to take responsibility and save over-and-above the auto-enrolment minimum where they can afford to.”
