Will the increase in bond yields reduce transfer values? — Hoxton Capital Management

Will the increase in bond yields reduce transfer values?

The biggest misconception that we come across is that a defined benefit pension valuation will increase over time. Often, when we speak to people regarding their DB pensions and obtain a transfer value from the scheme, they understandably believe that the valuation will be higher if they have it revalued in a few years’ time.

Unfortunately, this is not how transfer values work. When you request a transfer valuation, the scheme will calculate the expected cost to purchase the same benefits as they are offering you. In simple terms, what amount you would need as a lump sum in order to get the same annual income you would get from remaining in the scheme.

This is a complicated calculation that each scheme may do slightly differently. You can read more about CETVs (Cash Equivalent Transfer Values) here. The main thing to understand is that the calculation uses variables, such as interest rates and bond yields. Therefore, as those vary the valuation will also change, but not necessarily as an increase.

The relationship between transfer values and Gilt (Bond) yields is inverse. As Gilt yields (specifically the yield on a 5-year Gilt) increase, the transfer valuation will go down. This is because a pot of money that is invested into bonds will now pay a higher return and therefore, the size of the pot needed to obtain the same amount of income as the scheme was promising the member, can now be smaller.

What can you do?

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