DB transfer values sink in September

Hannah Godfrey writes

Defined benefit (DB) transfer values fell sharply during September, returning to levels seen in early August, according to Xafinity’s transfer value index.

The value of Xafinity’s hypothetical pension reduced by 4% throughout September from £240,000 in the first week to £230,000 by the end of the month.

The difference between the maximum and minimum readings of the transfer value index in September was £12,000 – or about 5%.

Xafinity’s index tracks the transfer value that would be provided by a hypothetical DB scheme to a member aged 64 who is entitled to a pension of £10,000 each year, starting at age 65. It increases each year in line with inflation.

September’s reduction has undone the increase in August, which saw the index rise by 3% from £230,000 at the beginning of month to £237,000 by the end of it.

Xafinity head of DB growth Sankar Mahalingham said the driver for the return to early-August levels was an increase in gilt yields over the course of September, with longer-term expectations for inflation remaining largely unchanged.

He explained: “Historic consumer price index inflation was 2.9% in the year to the end of August, up from 2.6% a month earlier. This statistic was released on 12 September and raised speculation in the markets the Bank of England Monetary’s Policy Committee may start to raise the official bank rate sooner than previously thought.

“This possibility was reinforced in comments made by Bank of England governor Mark Carney in a lecture given to the International Monetary Fund in Washington a week later. When expectations for increases in the official bank rate accelerate, it is normal to see gilt yields increase – all else being equal – meaning the rise in yields over the month was not surprising.”