Help Understanding DB Transfer Value - Reduced ?

Aletank

I've just received a CETV Statement for my DB pension but there is 2 values and I'm not sure which one is available to me. Here is the basics

Total Cash Equivalent Transfer Value (Reduced) -

£69,769
[*]Reduction Applied Due To Current Funding Position Of The Scheme - 45.2%
[*]Full Cash Equivalent Transfer Value (Unreduced) - £127,353

[*]Total Deferred Pension At Date Of Leaving The Scheme - £6181

What is this reduced amount ? I know there is a shortfall in the scheme
Which amount is available to me to Transfer ?
I'm 39, Single, No Children - Just for some info on my situation
Thanks for any info

xylophone

Which amount is available to me to Transfer ?

Ring the administrator and ask.

Aletank

xylophone wrote: »

Ring the administrator and ask.

Just phoned - It's the reduced value that is available to me due to the shortfall in the scheme !

Thrugelmir

Aletank wrote: »

Just phoned - It's the reduced value that is available to me due to the shortfall in the scheme !

Why are you thinking of transferring out?

Aletank

Thrugelmir wrote: »

Why are you thinking of transferring out?

I am worried about the shortfalls in the scheme.
The company closed a couple of years ago, I was one of the youngest there so will be one of the last to claim my pension, I don't think the scheme will be in a good state by then !
Each year I get a newsletter, the shortfall either increases or stays the same, makes me wonder where these experts are investing the money as stock markets have done well over the last few years.
I'm thinking by investing the transfer value over the next 20 years in a SIPP - Could I give myself a better income than £6k a year ?

AlanP_2

In broad terms the reduced transfer value is approx 11x your predicted annual pension, that is very low compared to most CETV multipliers I have seen on here and my own.

Even the unreduced CETV multiplier at around 21x is nothing astonishing.

If you worked on a drawdown rate of 5% from your SIPP pot once retired you would need around £123k in there in 20 years time to draw ~£6k. You would then be relying on market returns to keep up with your ongoing requirement of £6k + CPI per year for possibly 40 odd years.

20 years at 3% return above inflation on your £69k gets you to about £124k so could work out OK but YOU WOULD BE TAKING ALL THE RISK.

Even if the scheme fails because the company goes bust* the Pension Protection Fund would pick it up and pay out 90% of your estimated pension so most you would lose is £619 per year.

So you would be risking a £619 per year loss and then getting a guaranteed £5571 per year pension that increases each year by CPI (I think it is the CPI rate they use) compared to trusting the whole lot to the vagaries of the market is the choice you need to make.

The fact that you have no dependants means any Spouse / Child pension payable from the DB scheme if you die is less valuable to you than it would be to somebody else so that isn't a factor in this case, although I guess at 39 that could change in the future.

* You say the "company closed a couple of years ago" - Who is now responsible for the scheme if your then employer has ceased trading?

Malthusian

Currently the scheme does not have enough money for everyone to take what their fair share would be if it did have enough money. If that sounds a bit circular, it is. I don't know why they've even quoted you a "transfer value" that you can't use for a transfer, it only sows confusion and fear.

That does not mean that the scheme won't have enough money to pay your pension in 25+ years' time. The scheme is required to calculate the shortfall according to certain assumptions. Currently gilts are very expensive - they may not always be. Stockmarkets may grow by more than the scheme expects. Its members might die earlier than the scheme expects. Nobody knows.

What you do know is that if the scheme does run out of money, and the company cannot make up the shortfall as it is legally required to, the scheme will go into the Pension Protection Fund. You would take a 10% haircut if you had not reached your standard retirement date. However the likelihood is that you will still be better off with 90% of the DB pension than with the CETV in your SIPP, especially given the cut due to the shortfall.

Aletank wrote: »

Each year I get a newsletter, the shortfall either increases or stays the same, makes me wonder where these experts are investing the money as stock markets have done well over the last few years.

But the money they have to pay out to those who've claimed their pension will come out of the stockmarket growth. And it wouldn't surprise me if relatively little of the scheme is invested in the stockmarkets - as opposed to long-term gilts. (Which are currently very expensive, but they are pretty much the only thing you can invest money in which will deliver a known income for 20 years or more and the money will still be there at the end, hence why pension schemes invest a lot of money in them.)

How good the scheme trustees are at managing money is of very limited interest to you. If they're really good at it you won't get more pension - you either get your entitlement or you don't, and if you don't you get it from the Pension Protection Fund.

By "The company closed a couple of years ago" - do you mean the company closed the pension scheme to new accrual?

Aletank

Thanks for the detailed replies !
When I say the company closed a couple of years ago, i mean the company I worked for ceased trading and made everyone redundant. So no more payments are being made into the scheme, just people drawing from it.
The pension scheme is now run by Deloitte

jamesd

Transferring would be a very bad mistake. Don't do it.

All that will happen if the scheme fails is that it would be taken over by the Pension Protection Fund and your pension would be cut to 90% of planned value, increasing with CPI inflation. Even though the PPF takes over failed schemes it currently has a significant surplus.

If you transfer the main effect will be to lock in the 45.2% loss. Better to take the PPF if that does eventually happen.

Just relax, basking in the security that the PPF provides you.

PensionTech

I don't know why they've even quoted you a "transfer value" that you can't use for a transfer, it only sows confusion and fear.

It's a legal requirement.

In broad terms the reduced transfer value is approx 11x your predicted annual pension, that is very low compared to most CETV multipliers I have seen on here and my own.

Even the unreduced CETV multiplier at around 21x is nothing astonishing.

I would just warn about this being a really simplistic way to look at CETVs. I know it's a common metric on here and I've even commented on multipliers myself, but it just isn't that easy to look at a CETV and know whether it's "good value" or not. CETVs can vary hugely. They depend on the member's age and sex, the estimated demography of the scheme, the terms of the benefits actually being valued, the scheme's investment strategy, the funding level (as in this case)... and by law it has to be the best estimate of the current value of the cost to the scheme of paying the member's benefits, so talking about it like it's a cheeky offer on a used car is just a bit misleading.

makes me wonder where these experts are investing the money as stock markets have done well over the last few years

It's not that the assets aren't doing well, it's that the amount that trustees think they need to hold right now in order to pay out the pensions in future is increasing. That doesn't actually mean that they won't be able to pay out benefits though. The amount of benefits that the scheme will have to pay out is more or less fixed - the valuation just reflects the future investment return that the scheme expects to achieve. This has to be assumed, and those assumptions tend to be based on gilt yields - which have suffered very heavily as a result of quantitative easing. There is a lot of discussion over whether this is an appropriate way to value schemes, but it is the generally accepted method right now.

Anyway, as has been pointed out, this is largely immaterial at the moment - the steep reduction makes it very hard for a transfer out to be anything but a terrible idea, even if the scheme does fail and end up in the PPF.

kidmugsy

"I was one of the youngest there so will be one of the last to claim my pension": which means that if the shortfall ever turns back into a surplus the last few will presumably get very handsome pensions. At least, so I guess: who else could the surplus legally be given to of the original sponsor is defunct?