Please advise occupational pension transfer value down nearly 25% in 1 year !!!

alkalo

Just received my transfer value from an old company final salary scheme which is is now administered by Jardine Lloyd Thompson. They tell me my transfer value has been reduced legally under actuarial advice to an available £62000 now compared to a full transfer value £77500, I was hoping that with a modest increase in last year it would have been £80000.I was hoping to realise these funds as I want to emigrate in 18months but this will put a severe restriction on my plans . How is it possible to have a reduction of 25% in 1 year ? Even the government bail out would not be so severe with a 10% loss in pension !!! I need advice on best way forward to realise as much cash from this scheme . Please help .

Lokolo

Have you not noticed that stock markets has collapsed over the last year?

EdInvestor

The actuaries may also be taking into account increased life expectancy of scheme members, if appropriate.Any scheme funding deficit (possibly caused by market falls)will impact on transfer values.

How does the OP plan to realise cash from the scheme? Usually only 25% would be available if s/he is over 50 (55 from April next year).

alkalo

I fully understand that stock market has collapsed but I was under the imression (perhaps mistakenly) that a final salary occupational pension has safeguards to enhance rather than diminish the pension year on year .
I am 54 and was hoping to take 25% lump sum plus annuity to add to an existing pension i am in receipt of. At £80000 i could just about have a good life where I am going so £62000 makes a big difference .
I had complained to the administrators each year for the last two with regard to their (mis)management of this company scheme. They will not allow early retirement of the scheme and say any withdrawal will be subject to 8% reduction for each early year taken compounded . I am not an expert on pensions and am easily confused with the alternatives offered so am looking for a nod in the right direction through this quagmire to achieve maximum funds available . thanks in advance for your helpful replies . they are much appreciated.

dunstonh

I fully understand that stock market has collapsed but I was under the imression (perhaps mistakenly) that a final salary occupational pension has safeguards to enhance rather than diminish the pension year on year .

The money in the pot to fund the defined benefits is still invested. You are asking to cease having those defined benefits and want a value instead (simplified the wording here for convenience of understanding). There are other issues that can impact on transfer values as well.

I am not an expert on pensions and am easily confused with the alternatives offered so am looking for a nod in the right direction through this quagmire to achieve maximum funds available

Virtually all schemes now require and IFA to sign off on an occupational pension transfer into a personal pension scheme. Had you found an IFA willing to do this for you yet? If so, they should be telling you all the negatives, potential issues and make you aware of just how much money you are going to lose by doing this.

jh2009

Transfer values for defined benefit schemes reflect the value of the benefit held at a point of time that the transfer value is valued. These values do not increase in time but fluctuate and so can go up and down. These values fluctuate as things such as life expectancy, economic conditions, scheme funding, etc changes and so its not unusual for these to fluctuate. Transfer values for this reason could never be expected to increase at a steady rate over the years.

The theory behind them is that the value replicates the cost of providing a similar benefit in another scheme. If for example the value is £50,000 the estimate is that this plus any investment growth in the new scheme will provide an equivalent benefit to the one you have given up in your old scheme. In reality however you can end up with a higher or lower benefit as this calculation is very difficult to make. Many have argued the values paid in recent years are to low, hence why transferring pensions should not be a decision taken lightly.

If the scheme has funding issues, (or if the scheme had a surplus) then the scheme is allowed to reduce or increase a transfer payment accordingly to be fair to members who remain in the fund. This is to stop a small number of people leaving the scheme and worsening any deficit for those who remain, or not sharing in any surplus if the opposite applies.

Transfer values though are irrelevent if you leave the benefit in your current scheme. They are only important when a decision is actually taken to transfer a benefit. If you do not transfer then unless the scheme have notified you otherwise your benefit in the scheme remains unchanged and payable from your Normal Retirement Date.

Allmost all schemes will pay your pension if you live overseas, so its not essential you transfer if you emigrate. Though you may have currency conversion implications from reciept of payments from this scheme if you draw this while living abroad.

As for early retirement, then although many schemes provide early retirement options there is no legal right to early retirement. Legally they can only provide this option from 50 (55 from 6 April 2010), with the exception of certain medical retirements. As for an 8% reduction you have to take into account that if they pay you at an early age they will expect to pay your pension for a longer time period. The reduction effectively spreads your pension over a longer time period. If everyone lived to an age matching expected life expectancy then the date you retire is irrelevent, the 8% reduction in the scheme pension is the schemes way of meaning your retirement causes no loss or benefit to either you or the scheme. In reality of course everyone is different (some die young, others live past 100) but on average its designed to work out. If they didnt apply this reduction then either someone has to pay this cost of your early retirement (eg the company), or if not the other scheme members would have to subsidise your early retirement (which is a unfair on those who dont take early retirement).

MikeJones_2

Hi alkalo,

Rather than go into a detailed explanation here, I’d recommend that you read a couple of documents about transfer values at the top of this list of publications about the latest transfer regulations. In particular, The Pension Regulator’s guidance and the document produced by Wragge & Co’s pensions legal team.

Both documents give valid reasoning to the fact that just because a scheme is in deficit, does not mean that the trustees should automatically consent to reduce transfer values.

The argument behind this lies in that trustees of a defined benefit scheme must agree with the sponsoring employer a repayment schedule to make good any deficit. Hence, where the timescale is relatively short to make up the deficit, or where the sponsoring employer is financially strong, there is less reason to reduce transfer values.

If I were you, I’d write to the scheme administrators and ask:

1. What was the date of the last scheme valuation?

2. When is the next scheme valuation due?

3. Have the trustees commissioned an ‘insufficiency report’, and if ‘yes’ at what date?

4. Since funding may improve between valuations, either as a result of a recovery plan or for other reasons, a reduction to a cash equivalent which is appropriate just after the last valuation may no longer be appropriate as time passes. Have the trustees considered how their approach might be reviewed in such circumstances?

Point 4 is a straight quote using TPR’s paragraph 42, and is a thought-provoking point for any board of trustees.

If you choose to ask the questions, then let us know the answers and we’ll be able to make more comment.

Hope that helps.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

alkalo

thank you for the advice offered and I shall be writing to the scheme administrators with exactly the questions you say I should put to them
there is a little bit of history to this scheme which I am not best pleased with.
while working for the company the managing director said there was a tremendous surplus in the fund and would like to take 1 million loan interest free for the company at the same time reducing the tax liability . I said at that meeting if there is so much surplus why not give the employees a contribution holiday for 1 year . he ended the meeting immediately without reply . I left the company shortly after that meeting . In the intervening years and well before the recession and recent credit crunch I wrote to the company who said the fund was massively underfunded and a valuation being undertaken . The company had been taken over , the second company put the scheme to another firm of administrators and has now been given over over to yet another company of administrators . this makes me angry because firstly the fund had a massive surplus and is now in defecit although I am sure each change of administrators would have lined the pockets of all concerned except those who matters , the members !

alkalo

at long last a reply to questions to ask suggested by Mike Jones (many thanks for the input) below a summary of reply

the fall in transfer value from last year reflects the fall in the investment markets over the last year .the assumptions used to place a value on the benefits you hold are set with referenceto the investment markets.

transfer values are currently being reduced due to the current shortfall in funding of the scheme. the insuffiency report on which this reduction is based was carried out with a valuation date of 5 april 2007 - this coincided with last scheme valuation

the sponsoring employer and trustees have agreed a recovery plan to aim to restore full funding by 2015 via additional employer contributions . in the meantime valuations are carried out every 3 years with next one due 5 april 2010 and due to complete 2011 and trustees will decide wether transfer values still need to be reduced

unfortunately your nrd is over 10 years in future and we do not project benefits that far in advance . you can request a nrd nearer age 65

does this mean i am stuffed as far as getting a decent return from this seemingly ever decreasing pension fund?
thanks in advance for any advice with regards to this sad affair

alkalo

thanks for your help in formulating questions to be asked . it is appreciated

EdInvestor

alkalo wrote: »

in the meantime valuations are carried out every 3 years with next one due 5 april 2010 and due to complete 2011 and trustees will decide wether transfer values still need to be reduced

does this mean i am stuffed as far as getting a decent return from this seemingly ever decreasing pension fund?

THey are indicating that transfer values might rise after the next review due to complete in 2011 (by which time hopefully the markets will have recovered losses), so you could request a new transfer value at that point. The deduction would be less as you would be closer to your NRD.

Where are you emigratuing to? You might also be able to transfer the pension via the QROPs scheme leaving it invested but drawing an income from it.