LCP highlights link between generosity of DB transfer values and volume of transfers

There is a clear link between the relative generosity of defined benefit (DB) pension schemes' transfer values and the volume of transfers out, according to analysis from LCP.

It noted that this evidence could be important to schemes who are considering a range of member options designed to benefit members whilst improving the funding position of the scheme as part of its long-term funding strategy.

Since October 2018, the FCA has required financial advisers to measure the relative generosity of a DB transfer quotation by means of a ‘transfer value comparator’ (TVC), which is a comparison between the transfer value quoted and the cost of buying replacement benefits with the transferred funds.

LCP conducted an initial analysis of TVCs across around 200 schemes, which was published in 2018, and included findings such as a large variation between schemes in the TVCs that they offer which, in general, reflects variations in the cost to schemes of providing the benefits in question.

The initial analysis also found that TVC ratios tend to be much higher for those at retirement age compared with those 10 years out from retirement age.

It noted that, other things being equal, the transfer value for any given member tends to rise as they get closer to retirement, as the scheme assumes that the investment used to back the pension promise will make an investment return and there is less time for that return to be made as the member gets older.

The newest LCP research published confirmed these findings as “there are a number of schemes that provide transfer values more than double other schemes for members who are not yet at retirement".

The report also found that there is less movement in TVCs for those at retirement as the underlying investment mix has changed less since 2018 and that, for members 10 years out from retirement, average TVCs have improved by around 11 per cent since 2018.

A correlation between higher TVCs and higher take-up rates for transfers was highlighted in the report.

Based on schemes administered by LCP, the schemes with top quartile TVCs saw 24 per cent of transfer value quotations taken up, compared with just 14 per cent in the bottom quartile of schemes ranked by TVC generosity.

LCP partner, Clive Harrison, commented: “In recent years many DB pension schemes have been de-risking their investment strategy and this has fed through into an upward drift in the generosity of transfer values offered to members. But underlying investments still vary considerably, and this is reflected in a huge variation in the amount which different schemes may offer for the same pension benefit.

“We also find that schemes which offer more generous terms for transfers may see a materially higher level of transfer activity. In many cases more generous transfers will still improve overall scheme funding and it is a factor which trustees will wish to consider when reviewing the transfer values which they offer."

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