Pension transfers helped to fuel a 17 per cent increase in money coming out of FTSE 350 defined benefit pension schemes in 2016, Willis Towers Watson has found.

According to WTW’s analysis of FTSE 350 company accounts, an uplift in the number of members transferring from DB to defined contribution schemes could explain most of the increase of DB scheme payouts; although published accounts do not separate transfers from regular pension payments and tax-free lump sums at retirement.

Of the 101 FTSE 350 firms with DB schemes and 31 December reporting dates in 2015 and 2016, total payments rose from £20bn to almost £23.5bn. A quarter of employers said that payments increased by at least 25 per cent year-on-year.

WTW acknowledged that while pensions rise with inflation each year and the number of pensioners increasing, transfer activity is not the only explanation for the 17 per cent rise in benefit payments, however, it is likely to be the leading factor.

The firm noted that in most schemes the number of transfers in 2016 will have been small in relation to the total membership, although some members may still be considering their options until they are closer to retirement. Transfer rates were found to be much higher where employers paid for independent financial advice.

WTW’s previous research found that 31 per cent of members over 55 whose employers offered financial advice had chosen to transfer out in 2016/17.

Willis Towers Watson senior consultant Charles Rodgers 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.”

Rodgers added: “Transfers at older ages can see members get more than the accounting liability that is extinguished, with a small negative impact on company balance sheets; this will happen where the discount rate used to calculate the transfer value is lower than the corporate bond yields prescribed by accounting standards. In these cases, the deficits disclosed to investors would go up if companies started assuming that large numbers of people will in future transfer out shortly before retirement. However, this is not universal: transfers can be beneficial to some employers’ accounting numbers.

“If an employer was worried about this, it could encourage trustees to review how transfer values are calculated, though a less generous transfer value basis would make it harder for financial advisers to recommend that the member transfers. For most employers, any accounting strain will be less important than the opportunity to reduce risk and to get pension obligations off their books at a much lower cost than an insurer would charge.”

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