It is calculated that the ‘return’ on a defined benefit pension transfer value for the past seven years could be as high as 25% per year— a total return of about 480%. Pretty amazing given that it was closely linked to the bond market. Financial markets have taught us over and over again that returns of 20% + are unsustainable over the long term. Current bond yields of around zero or even negative in many cases are unsustainable and don’t make sense on a medium-term view. With Mr Trump’s expected reflationary policies, it’s beginning to look like the 30-year bond bull market might be ending – November was the global bond market’s worst month in 25 years.
In 2009, a person in their mid-40s requesting a transfer value for an expected pension of €5,000 p.a. at age 65 would be quoted €63,000, or 12 times the expected annual income. Not a great value and certainly not good enough to consider talking instead of an inflation-linked pension. In 2016, the transfer values being quoted are almost €300,000, or 40 times the expected annual income which has now risen to €7,000.
Pension funds must value their future liabilities based on long bond yields in the Eurozone which hit record lows earlier in the year. That has translated through to higher transfer values for individuals wishing to cash in their DB pension scheme. The more bond yields have fallen, the more transfer values have increased in value, particularly if you are 50 + or getting nearer to your retirement date when even the smallest of pensions could have a very attractive transfer value.
The price is very unlikely ever to be higher than 40 times the income and this is a bubble price particularly given where bond yields now are. With all the negatives around bonds, holding them to maturity might not be a good idea and cashing in might make sense.
For individuals, the question is, would having €300,000 to invest yourself now offset the certainty of €7,000 a year inflation linked from the age 65?