Is the time right to transfer?

If you are considering either “if” or “when” you should transfer your final salary pension into a more flexible scheme and take advantage of new pension freedoms, we hope this helps.  If the situation is unclear, the current UK pension deficit is well-documented.  It is at record-highs and it looks set to increase further.  In simple terms, the performance of most final salary pension schemes is linked to UK gilt yields. They are currently very low, so your investment return is also low, and the subsequent shortfall needs to be compensated by your pension scheme by pumping in more cash.

How has it happened?

It is unthinkable that going back to the mid- 90’s underlying investment returns in pension schemes were expected to deliver close to double-digit figures a year, every year.  Corporations needed only to find 25% in order to fulfil pension commitments with the remainder coming from investment performance.

Go forward ten years and the anticipated investment return on your pension halved to around 5%, so corporations then had 50% to find.  And now?  Returns could be as low as 2% – 3%. This means there is a balance of approximately 70% to magic out of somewhere, a very hefty expense for a company of any size, more so if they hadn’t planned for it.

So are oil and gas schemes potentially more at risk than others? 

Many believe this is the case.  There is always the possibility of another “Philip Green at BHS” and let’s hope it’s a remote one. When the price of an unpredictable commodity is thrown into the equation it can of course, complicate matters.  The oil price has fallen sharply and with it, revenues, we all know that.   However, before the latest decline, drilling in the U.S. was at record levels. This was fuelled not only by inflated energy prices, but also over-confident debt issues that between 2011 and 2015 totalled over $100 billion.  From next year this debt starts to mature and investors are expecting their money back from oil companies. As a consequence, they are already under extreme financial pressure.

Compounding the issue much of that debt is high-yield, or as it is also known, junk.  Next year $7 billion is due to mature and in 2018 $20 billion is set to be repaid. This is already having 70% of this debt amongst the lowest possible credit rating possible.  Pressure can only continue to build through to 2021 when around $30 billion of bonds and loans are due to end.

Is the worst still to come?

We all hope not, but it certainly could be.   Moody’s report an increase in defaults to over 100 this year alone with a worrying 49 of those coming from the oil and gas sector.  There is also a rising amount of firms with debt levels over 10 times greater than expected earnings. They might not survive if the oil price doubled or even tripled from its current level.

What should I do?

It is important not to panic and transfer your pension with the next firm that cold-calls you.  You should always give transferring a final salary pension serious consideration as you will be sacrificing “guaranteed” benefits.  In most cases this sacrifice results in greater flexibility and improved tax benefits. It also has the option to cascade the benefits down to loved ones in case of your death and that of your spouse. Nonetheless, it is still a commitment that requires serious consideration.

If you would like to learn more about secure, cost-effective pension transfers, and having your assets managed on a fee-based meritocracy without exit penalties, lock-in periods and quarterly administration charges, please get in touch. We believe the experience will be very different from the others you have had until now.