Reduction in pension Transfer Value

Academic

My partner recently got a new job in the public sector and is exploring the possibility of transferring her occupational pension from her previous (private sector) employer to the LGPS. She approached the old occupational pension administrators (Xafinity) and has received a transfer information sheet detailing the transfer value. The following is an extract from the document:

Transfer Value £68,862

Made up of the following elements

Value of pre 6 April 1997 Protected Rights £1,769
Value of the pre 6 April 1997 benefits in excess of GMP £9,156
Value of benefits accrued post 6 April 1997 £57,937

The transfer has been reduced to take into account the funding level of the Scheme, had it not been so, the full value would have been £102,377.00, consisting of £4,326 Protected Rights accrued prior to 6th April 1997, £16,205 benefits in excess of GMP prior to 1997 and £81,846 accrued after 6th April 1997. This reduction has been made in accordance with the provisions of paragraph 2 of Schedule 1A of the Occupational Pension Scheme (Transfer Values) Regulations 1996, as amended.

I'd be grateful if somebody with the appropriate knowledge could explain the reduction in value (as detailed in the bolded line above).

Thanks.

Aegis

It looks as though this is a final salary pension that is currently underfunded. Right now she's sitting on c£102k worth of benefits which will reduce to c£69k if she transfers. She should definitely seek advice from an independent financial adviser who specialises in pension transfers before she does anything, as to me (admittedly very inexperienced with final salary pensions) it looks like she would stand to lose over £30k worth of benefit value immediately by transferring.

Now, depending on the escalation of benefits and the inflation-proofing built in to the final salary she left on, there may be a possibility that transferring is still the right thing to do, but a full critical yield analysis will be required before she does anything with this pot.

Academic

Aegis, thanks for your response.

I'm not too surprised that the private pension scheme is underfunded, they closed it to new entrants several years ago; however I am surprised at the 30% reduction when requesting a transfer. Surely it is in their interests to 'encourage' members to leave the scheme and thus reduce their liabilities ?? I'm pretty sure I recall that the pension trustees offered an enhanced transfer option to existing member's a year or so ago (before my partner left) but this has obviously now been withdrawn.

Our initial thinking was to move to the LGPS as it is essentially guaranteed by the government and any forthcoming changes probably wouldn't be applied to accrued benefits. We will continue with the investigative process and attempt to determine how many years of LGPS service the quoted transfer value will purchase.

We will consult an IFA before making a decision.

Thanks again.

taliesin

Academic wrote: »

Aegis, thanks for your response.

I'm not too surprised that the private pension scheme is underfunded, they closed it to new entrants several years ago; however I am surprised at the 30% reduction when requesting a transfer. Surely it is in their interests to 'encourage' members to leave the scheme and thus reduce their liabilities ??

Not my area of expertise, but surely it's the other way round? Pension funds depend on having large numbers of members and the statistics of member survival. Members leaving increases the risk that the fund will not be able to cover its commitments to those that are left. In the current climate, there may well be a continuing element of "market value reduction" (a la "with profits" funds) too, since transfer out crystallizes what are so far only paper losses.

Academic wrote: »

I'm pretty sure I recall that the pension trustees offered an enhanced transfer option to existing member's a year or so ago (before my partner left) but this has obviously now been withdrawn.

That seems to speak against the point I made above, but I could see that encouraging contributing members (whose future contributions and longer lifespan are likely to extend the lifetime and costs of the scheme, as well as increasing complexity and uncertainty) to leave might make sense in terms of overall fund management. Your partner's leaving has changed her status with respect to the fund - I wonder whether this changed her eligibility? Alternatively, perhaps "enhanced" transfer merely meant "enhanced" with respect to the otherwise reduced value?

Maybe someone involved in scheme management can explain.

vbm

Aegis pretty much nailed it.

Schemes only have to provide your benefits at the schemes NRD, if you request a transfer before that date they can reduce the transfer value, if the scheme is underfunded.

Consult a fee based IFA

cj25_2

Academic wrote: »

Aegis, thanks for your response.

I'm not too surprised that the private pension scheme is underfunded, they closed it to new entrants several years ago; however I am surprised at the 30% reduction when requesting a transfer. Surely it is in their interests to 'encourage' members to leave the scheme and thus reduce their liabilities ?? I'm pretty sure I recall that the pension trustees offered an enhanced transfer option to existing member's a year or so ago (before my partner left) but this has obviously now been withdrawn.

Our initial thinking was to move to the LGPS as it is essentially guaranteed by the government and any forthcoming changes probably wouldn't be applied to accrued benefits. We will continue with the investigative process and attempt to determine how many years of LGPS service the quoted transfer value will purchase.

We will consult an IFA before making a decision.

Thanks again.

Couple of points:

Firstly, the reduction will have been applied because the scheme does not currently have enough funding to pay for all of the benefits promised. This is obviously a problem if you want to transfer and lose 30% of your pension, however it is worth considering how it will affect you if you stay in the scheme. Whilst the employer is still around, they will be obliged to make contributions in order to increase the schemes funding, so it's not necessarily a problem. The worst case scenario is of course that the the funding level does not improve, the employer goes into administration and the pension scheme is left with a shortful. This is less of an issue than it used to be due to the establishment of the pension protection fund (PPF). In this worst case scenario your pension might be passed over to them, and then you would still receive it.. however some of the benefits may be limited. It's worth checking out, and seeing if you can find out the PPF value of the pension, as barring a big u-turn by the government this will be the worst case scenario of staying in the fund. Offhand I think they pay about 90% of pensions for people who did not retire before the scheme entered the PPF, with a cap on the maximum payable, reduced pension increases and some other provisos.

Secondly, it's not necessarily in the schemes interest to encourage transfer values if they're underfunded. The company sponsoring the company may want to encourage these in order to reduce the overall liability, however the trustees of the scheme are required to look at what this will mean for all the members. The basic idea of the reduction, and why they don't want people transfering out at full value, is relatively simple to demonstrate,

Imagine the scheme had 2 members, each with a pension of £1000 with the scheme, however the scheme only has enough money to pay £1400 in pensions. If you transfer out and take your full £1000 pension away from the scheme, then the other member would be left with only £400! The reduction in transfers out is an attempt to equalise this, by reducing the pension they give you when you leave to £700 this means that the remaining member also keeps £700 of pension. Whilst neither of you get the full value of your benefits, it can be seen as fairer to treat you equally, and also stops there being a big rush to transfer out in order to avoid being the last one holding the (empty) bucket.

Thirdly, in response to "Our initial thinking was to move to the LGPS as it is essentially guaranteed by the government and any forthcoming changes probably wouldn't be applied to accrued benefits." Your pension scheme is not legally allowed to make any changes to benefits that have already been accrued. They can stop you accruing any more benefits, or make it so you only accrue 10p for every year of future service or do more or less what they like with benefits you have not yet earnt, however the benefits that you have earnt to this date are protected. The important caveat to this of course, is the chance mentioned earlier of the company failing and the pension scheme being moved to the PPF, with the reduction in benefits.

Overall, have a look at what would be available to you from the PPF as compared to what you can buy from the LGPS but this is probably something you want to get proper advice on as £30k is definately not insignificant!