Final Salary pension transfer values

SallyG

I've been reading and trying to make sense of the current consultation.
http://www.fsa.gov.uk/static/pubs/cp/cp12-04.pdf
Apparently when someone in a final salary scheme decides to retire, the scheme buys an annuity to provide the income required .......so the CETV of a final salary pension is the cash amount required by the scheme to buy an annuity that will provide that income?
People required to transfer out their share of a final salary pension on divorce find there's a big shortfall between the income the final salary scheme promise and the annuity income they personally could secure for the CETV offered outside the scheme.
Is that difference simply down to the annuity buying power of the pension scheme?

I don't understand why there's such a kerfuffle now about people transferring out of final salary pensions voluntarily and fully advised by IFAs when for years final salary schemes have been forcing out people who've acquired a share of a final salary pension on divorce with no requirement to ensure the effects are fully understood by the people involved.

jamesd

A scheme doesn't have to buy an annuity.

Don't count on a CETV being sufficient to buy an annuity that pays out the benefits in a final salary pension scheme. The markets are different and a CETV is not calculated based on the annuity purchase market.

CETV use on divorce is a mess. Better to split the pension benefit if at all possible.

SallyG

Thanks jamesd - your explanation rings a bell .... forgive me if you've explained this before.
Just one little line in the pension sharing legislation about sharing defined benefit pension benefits could have saved quite a few from damaging a really good pension?

hugheskevi

so the CETV of a final salary pension is the cash amount required by the scheme to buy an annuity that will provide that income?

I think this is quite close to the heart of the problem. Most people I have come across considering these offers seem to take the transfer value as a fair statement of the value of their benefits when in fact it is much more complicated than that.

The design of CETV is that it should represent the cost to the scheme of providing a member's pension.

That means that the cost of annuitisation isn't included - insurers have load factors of about 10% on annuties, and more for index-linked annuities.

And the DB scheme (institutional) is likely to have lower charges than a DC scheme (retail).

So, other things being equal, the CETV is unlikely to provide a member with equal benefits than they would have had from the DB scheme.

On the other hand, a member with a health condition such that they think they will die younger than average might be able to get a competitive impaired life annuity, whereas they wouldn't get a higher DB pension because of the condition. And similarly, a single person doesn't get any extra DB pension for being single, whereas they would only need to purchase a single-life annuity.

jamesd

Whether CETV is fair is easy enough, it isn't. I expect it to systematically under-estimate the value of a pension's income. Just as happens with transfers from defined benefit schemes, where the FSA is saying that the current methods systematically under-estimate the value by around 15%.

Someone considering transferring a final salary pension on the basis of a transfer offer should exercise great caution unless they are single or of lower than normal life expectancy.