Some DB schemes potentially overpaying transfer values by 10%

Some defined benefit (DB) schemes could be overpaying transfer values by up to 10 per cent by not updating transfer terms to reflect the impact of Retail Price Index (RPI) reforms, Hymans Robertson has warned.

Urging schemes to revisit their terms, the firm noted that RPI will trend down to the Consumer Prices Index including owner occupiers' housing costs (CPIH) from 2030 following the government’s announcement last November, but market implied RPI did not reflect this expectation.

Hymans said that this indicated that investors were currently paying a significant premium to hedge inflation, potentially of around 0.5 per cent per annum.

Hymans Robertson head of corporate DB, Alistair Russell-Smith, said: “Transfer values are often linked to market implied RPI. They do sometimes deduct an ‘inflation risk premium’ from market implied RPI, but it is rarely as large as 0.5 per cent per annum.

“If a scheme is currently using market implied RPI to calculate transfer values, it is arguably overstating the transfer value for RPI linked liabilities by around 10 per cent.

“We predict that with DB pension scheme increases most commonly linked to RPI, this could have significant implications for future and current pension savers. To ensure they are not currently overpaying, schemes should revisit their terms and transfer value bases as a matter of priority, and make certain that the RPI assumption is adjusted to take account of the impact of RPI reforms.”

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