DB CETVs fraudulently calculated before 31-Mar-2015 triannual valuations published?

agarnett

I have a feeling that there may be more than one surreptitious reason why the gates were hastily swung wide open for Pension Freedom this year. The General Election is one obvious reason, but as a suggested motive, it may serve as a diversion to the real one.

Remaining DB pension schemes are, with far too many exceptions, notoriously underfunded. Yet they need only be formally revalued once in every 3 years, and even then, the valuations are permitted to take up to 15 months beyond the 'effective date of valuation' before they ever see the light of day and get published.

These valuations also demand quite obviously a simultaneous review of how CETVs are calculated.

IFA's should know the answer to this, but my brief reading around the subject suggests

• that maybe 40% of all DB schemes in the country are due for a mandatory 3 year valuation at the end of this month.
• these valuations are likely to show very serious shortfall in funding - far more so than has ever been the general case previously
• CETVs are being issued like confetti at the moment often using grossly inaccurate methods of calculation based on what are now known to be false and invalid parameters.

It seems likely that CETV calculations are currently being systematically and bare-facedly managed using corrupt actuarial advice - if you are an employer responsible for funding a DB scheme, then you and your chosen trustee directors can buy services of actuaries in the City who will show you how to shortchange members who have been encouraged to consider transfers out. And while you are at it, you can buy extra insurance to protect your trustee directors from being sued by the members.

I was reading a recently issued blue chip Report & Accounts and it's all there between the lines.

Now then, I notice there seems to be plenty of assertion in the forum here today that IFAs advising on pension transfers are worth £150 per hour, but hands up any IFAs who have actually challenged accuracy of DB Scheme CETVs lately as opposed to taking them as gospel and basing their own advice upon what has been quoted by scheme administrators?

Or maybe IFAs haven't studied hard enough to be qualified to question the fundamentals of what they advise upon - that's for £600 per hour actuaries to know about and for we mere laypersons to find out - if we ever even get a sniff of what's really going on with our money.

sandsy

I think you're right that deficits will grow, not unsurprising given the falls in gilt yields.

But my understanding is that the CETV basis is reviewed a lot more regularly, even if just on a formulaic basis, eg. Use month end gilt yields etc. so the CETV would change monthly.

I understand your concerns about actuaries. As advisers to a scheme, their interest is in keeping the scheme as a source of income which could be seen to conflict with their professional obligation to act with integrity.

I would expect an adviser with the pension transfer specialist qualification to be able to challenge a CETV if they performed a transfer value analysis which resulted in a critical yield outside the normal parameters. But virtually impossible for most normal people to judge whether a CETV is appropriate, especially given the wide range of different benefits within a DB scheme, all being revalued and escalating at different rates.

Aegis

Short answer: yes, I "sense check" the CETVs for my clients.

Slightly longer answer: I don't do it by actuarially critiquing the scheme's status from an actuarial perspective, as that's far outside my sphere of competence. Instead I use open-market annuities (which are themselves actuarially calculated to break even for the provider with a little profit margin on top) as a reference and comment on i) any major differences between the DB scheme value and an annuity purchased with the same broad characteristics and ii) the reasons for any discrepancies. It's a crude method, but it swiftly identifies whether the CETV is offering broadly correct value for money or not. Where it isn't, the trustees can be interrogated to find out why, but most of my clients don't encounter such issues.

hyubh

agarnett wrote: »

These valuations also demand quite obviously a simultaneous review of how CETVs are calculated.

IFA's should know the answer to this

I'm confused - is there a grand conspiracy of actuaries in your view, or of IFAs? Perhaps they are in it together!!!

[*]these valuations are likely to show very serious shortfall in funding - far more so than has ever been the general case previously
[*]CETVs are being issued like confetti at the moment often using grossly inaccurate methods of calculation based on what are now known to be false and invalid parameters.

Given these points, CETVs should be less generous than otherwise (within the law, and not so much as to kill off demand) for the sake the remaining members and their pension rights. Assuming you aren't in favour of a general government bailout (though maybe you are?), you seem to be of the view members wanting to transfer out now should be specially privileged - why so?

if you are an employer responsible for funding a DB scheme, then you and your chosen trustee directors can buy services of actuaries in the City

What's you're alternative then - government-mandated actuaries who work in Devon...?

agarnett

Aegis wrote: »

Short answer: yes, I "sense check" the CETVs for my clients.

Slightly longer answer: I don't do it by actuarially critiquing the scheme's status from an actuarial perspective, as that's far outside my sphere of competence. Instead I use open-market annuities (which are themselves actuarially calculated to break even for the provider with a little profit margin on top) as a reference and comment on i) any major differences between the DB scheme value and an annuity purchased with the same broad characteristics and ii) the reasons for any discrepancies. It's a crude method, but it swiftly identifies whether the CETV is offering broadly correct value for money or not. Where it isn't, the trustees can be interrogated to find out why, but most of my clients don't encounter such issues.

Thanks Aegis.

Yes I think even on this board, we are seeing significant, questionable, and now highly suspect differences emerging.

A little while ago we heard from a member who is a member of the Barclays 1964 scheme which has been closed for new contributions since 2010. He had seen his CETV quotes increase from around £150,000 in 2010 to almost £500,000 earlier this year. Low bond yields are said to be the reason.

I am a member of a scheme which is now part of the number one risk on a man called Stephen Hester's Group Strategic Risk Register at RSA. It is identified as Risk "01" looming, both the one most likely to hit in the next 12 months, and also one estimated as "Very High Impact > £50M". The Risk 01 "owner" is that other ex RBS wallah, Richard Houghton, the CFO, who surprise, surprise resigns in May 2015 :rotfl: What will he own in two months other than a very nice pension pot that most could only dream of?

Like the Barclays example, my CETV was also a little over £150,000 in 2010. Earlier this year it was quoted at a little under £180,000. An approximate 3%pa increase.

On a full buy out basis RSA have had to agree that their DB schemes have a shortfall of over £3BN and yet they are only shoring it up at a 2 years ago agreed current annual rate of £33M based on a valuation effective at 31 March 2012. That is supposed only to stop the deficit rot by 2022 based on terribly outdated 3 years old, cynically manipulated economics. In terms of putting out any fire now, it is surely like p|ssing in the wind!

And even yesterday they published smoke and mirrors claiming an increased 97% funding level at 31st March 2014!

The words used to describe their pension scheme liabilities seem deliberately inconsistent and obtuse. Just as it would be inconsistent and obtuse to recommend keeping a classic car to use for racing when it was known that it could only be run on 4 star fully leaded petrol when no such juice or alternative remains available or ever will be again, but don't worry because it has a full tank of 4 star right now :rotfl:

As an academic exercise for all you IFA CETV fraud detectives, you too can search the PDF file of the RSA Full Report and Accounts for phrases such as pension scheme and scheme actuaries and thereby begin to dig out the wordy 'disclosures'. You may then read between those lines as I have done.

We are talking of a FTSE100 company, like Barclays.

One big difference ? RSA is not a Barclays. RSA is apparently still reeling from something nasty and internal, and its DB schemes have a much higher proportion of unrepresented deferred members.

Large numbers of the Barclays 1964 scheme are still actively employed and are represented. You can't easily kid kidders so Barclays CETVs have to be the real deal.

Large numbers of members of RSA's three main pension schemes are long term deferred members who left the company or its predecessor constituent companies long ago.


So hyubh is confused, but let me tell him that if IFAs are anything like your best mate next door with the flash car who has offered to come with you when you buy one too, can read the price tags, and will run the numbers for you, but who actually can't tell the difference between something red wheeled-in to look like a Ferrari, and a real Ferrari, then what's the point of having your mate along?

If IFAs cannot judge two CETVs beyond the fact that they both come with an actuarial seal of approval (in my examples the same firm of City actuaries!) and both look the business even though one seems unbelievably cheap compared to the other, and if IFAs are programmed by their position in the industry to broadly accept what trustees hand down from their actuaries about the reasons, then what real use are IFAs in offering DB Scheme pension transfer advice?

For example, what might a more useful IFA offer in response to this if it appeared as commentary on a client's existing scheme, one where the client was wondering whether to cut and run or stay to face the new 31 March 2015 music which is most unlikely to get publicly released or played for a further 12-15 months?:
[SIZE=-1]

The Scheme Actuaries also carry out
interim assessments on an annual basis
and at the last update as at 31 March 2014,
the funding level was estimated to have increased to 97%.
This update is not formally agreed between the Group
and the Trustees but reflects changes in market conditions and
the deficit contributions paid.

For completeness, in addition to
calculating the funding valuation, the
Scheme Actuaries also provide an
estimate of the cost of full risk removal
by purchasing annuities from an
insurance company to meet the existing
retirement obligations. This is a
theoretical calculation and does not
reflect what we expect to pay into the
schemes. In common with most UK
defined benefit arrangements,
the liabilities and hence deficit on this basis
are materially higher than on an ongoing
funding basis and as at 31 March 2014
there was estimated to be a shortfall
of approximately £3.1bn
due to the use of more conservative
assumptions in relation to future
investment return and to a lesser
extent, how long members will live.

[/SIZE]

As for ...

Given these points, CETVs should be less generous than otherwise (within the law, and not so much as to kill off demand) for the sake the remaining members and their pension rights. Assuming you aren't in favour of a general government bailout (though maybe you are?), you seem to be of the view members wanting to transfer out now should be specially privileged - why so?

... that puts me in mind of a considerable band of serious-minded chaps who have woken up to the fact that the labour camp is not really the place to end one's days, but whose fellow head-down, stay-behind inmates are not prepared to condone the taking of any part of the dwindling rations in the storehouse (at least those last seen by anyone 3 years ago) to facilitate anyone daring to plan an escape! Instead, everyone should dash such ideas, knuckle down and, if no longer able to work for the powers that be, just shut up, be grateful for what gets tossed their way, and let the employer get on with building bridges to quick profit whilst treading down the aspirations of third class upstarts!

What's you're alternative then - government-mandated actuaries who work in Devon...?

Not sure about Devon! Isn't it full of retired actuaries? Or maybe the retired ones are more likely to have preserved their moral compasses? But as with the general need these days to deter all opportunity for potential fraud conducted in the name of financial services industry profit, full transparency is key. We are currently far from it with the calculation of DB scheme CETVs where there is no proper representation for scheme members (individual trustee directors are clearly token figureheads now at best).

hyubh

agarnett wrote: »

As for ... ... that puts me in mind of a considerable band of serious-minded chaps who have woken up to the fact that the labour camp is not really the place to end one's days, but whose fellow head-down, stay-behind inmates are not prepared to condone the taking of any part of the dwindling rations in the storehouse (at least those last seen by anyone 3 years ago) to facilitate anyone daring to plan an escape!

Yes yes, exercising a statutory right to a transfer out from a DB scheme and getting a transfer value lower than you had hoped is just like being sent to the Gulag in Soviet Russia. What stunning powers of perception you have!

But as with the general need these days to deter all opportunity for potential fraud conducted in the name of financial services industry profit, full transparency is key. We are currently far from it with the calculation of DB scheme CETVs where there is no proper representation for scheme members (individual trustee directors are clearly token figureheads now at best).

As if it weren't obvious, I'm denying that if a CETV is lower than it would have been due to fund deficits, it is therefore 'fraudulent'. Quite the opposite: I think it would be 'fraudulent' on the remaining members if such a policy were not given due consideration, and insofar as the law may prevent this, it is bad law. The public interest is served by DB schemes paying out what they promised, not being generous to the minority (like yourself) who want to bail out.

agarnett

hyubh wrote:

... just like being sent to the Gulag in Soviet Russia.

Not quite ... the way you've now confirmed it is more like members of the escape committee being obstructed from making a clean getaway by the other inmates - those who have been brainwashed into staying put and into waiting patiently for a piece of meat once promised to appear in some future soup, but as yet not seen nor tasted!

As if it weren't obvious, I'm denying that if a CETV is lower than it would have been due to fund deficits, it is therefore 'fraudulent'. Quite the opposite: I think it would be 'fraudulent' on the remaining members if such a policy were not given due consideration, and insofar as the law may prevent this, it is bad law. The public interest is served by DB schemes paying out what they promised, not being generous to the minority (like yourself) who want to bail out.

Well thankfully we operate under the rule of law which means that however much you might like to see individual officials such as trustee directors, FDs, outsourced administrators and paid actuaries feeling free to put their own interpretation on what is in the public interest and what isn't, they are simply not permitted to ignore the law. If they are ignoring the law and misrepresenting the true values and the deficits and shortfalls and consequently misrepresenting the duties of employers to shoulder Risk #01 and to make up the shortfalls, and if they are doing that for the purposes of earning #1, i.e. themselves, a fee, or for the chance of promotion, or simply just to keep a job by impressing a boss or two, or the shareholders, then they thoroughly deserve to be punished. No newly arranged insurance policy will protect them from that.

Seabee42

Gilt yields are a funny thing, they have predominately been driven down by quantitive easing (the bank of England has been buying them) and they are widely used to measure the liabilities of defined benefit pension plans. For large plans that will not have to buy out the liabilities there is no reason why a change in gilt yields will actually increase the cost of the pension they have to pay in cash to their pensioners.

What changes in the valuation is what discount rate they can use i.e. how much money they need to hold now to have enough money to actually pay the money when due. Again it does not have to directly link to gilts if the fund itself does not choose to invest in bonds (most do).

Most schemes will have more money now than three years ago and are arguably no worse of to pay there liabilities when they fall due.

Still being underfunded does allow the trustees to consider reducing transfer values if it would affect the remaining liabilities. (All members should be considered equally). When all is said and done a transfer is an option and choice for the member instead of the benefits accrued in the scheme and as such no one is forced to take one.

Finst

Thought I would set out some points that will set your mind at rest a little...maybe

- CETVs are set by the Trustees of the pension scheme, and are required to be at least equal to the expected cost of providing the pension given up. The Trustees are legally required to act in the interests of the members of the scheme, and while they take advice from actuaries in setting the CETVs, neither the actuaries nor the company sponsoring the scheme has the right to override their decision

- CETVs are set in such a way that they automatically track specific indicators of financial market conditions. For example, if expectations of what future inflation is going to be rise, then CETVs automatically rise as well (because its going to cost more to provide that pension). The same is true for the expected investment returns the scheme is going to generate. Most pension schemes update for financial markets on a monthly basis - what happens at the 3 yearly review is that the principles of how the CETVs are calculated are reviewed to make everything is still ok - sometimes changes are made, sometimes not

- Pension schemes ARE allowed to reduce CETVs to reflect the fact the scheme is underfunded and there is some concern that not all the benefits will be paid. This is so that departing members don't cream off all the assets and leave members who stayed in the scheme with nothing. But there are 2 crucial points - firstly it is the Trustees who decide this and they are required to balance the interests of members who leave and members who stay. Secondly, if the CETV has been reduced, the member must be told of the reduction when he/she receives his CETV quote. If anything, based on what you've suggested, CETVs should drop after the latest valuations are finalised, not rise

Plenty of reasons to be cautious of exchanging a valuable pension promise for a CETV, but the timing of the triennial valuation wouldn't even be in my top ten.

agarnett

Finst wrote: »

Plenty of reasons to be cautious of exchanging a valuable pension promise for a CETV, but the timing of the triennial valuation wouldn't even be in my top ten.

Well it was the number one change to wait for given to me by someone whose title suggests they that they know a heck of a lot more about it with my particular scheme than they will ever let on. That person did also assure me that there was some continuing disagreement amongst trustees, but the way they said it suggested that it was not much more than a slight nuisance to the preferred way.

Trustee directors are in the main appointed by the employer and their futures depend on that employment relationship being maintained. There is such obvious conflict of interest now in these matters in the UK that it is obscene that it is still shoved in our faces and offered as fair dealing.

So Finst, I'd give your piece a B-, I'm afraid. I hope you aren't an actuary or a trustee.