Help Understanding DB Transfer Value - Reduced ?

PeacefulWaters

kidmugsy wrote: »

"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?

That's quite an interesting question.

Although I assume a fully closed scheme will be investing in lowest risk investments to guarantee returns, so it's unlikely there'll ever be a significant pot left over. Doubtless the admin charges will conveniently mop up anything!

Malthusian

kidmugsy wrote: »

"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?

If there is a large surplus the trustees have not been doing their job correctly. Once the pot had grown large enough that there was enough money to guarantee that the everyone could have their pensions paid by investing in inflation-linked gilts or other 100% secure investments, then the trustees should have done exactly that. 100% security and 0% chance of any further capital growth which might leave a significant surplus at the end.

As PW says I expect there will be some kind of closing fee applied by Deloitte to mop up any small balance which is left after the last member has died.

The last few will not get more handsome pensions - they will get what they are entitled to just like everybody else. If a surplus was handed out to the last few survivors, the trustees would have unjustly favoured those last few at the expense of everybody else in the scheme (by putting their pensions at more risk than was necessary in order to generate a bonus which only a few scheme members received).

That at least seems to me how it should work in theory. I'd be interested to know if this situation has ever arisen in reality.

greenglide

When the scheme was down to really numbers could they not set out winding it up if its was still solvent by offering lump sums, offload their responsibilities with an insurance company etc?

Which still doest answer what to do if there was money left after that. Give it to the PPF????

fifeken

AlanP wrote: »

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.

Having recently received a CETV statement myself, this quote jumped out at me. What sort of figure could be expected, as mine appears to be in 3 figures based on this calculation? What sort of factors affect it?

PensionTech

Having recently received a CETV statement myself, this quote jumped out at me...

Then I suggest you read my post #10 which explains why this “measure” is misleading.

What sort of figure could be expected, as mine appears to be in 3 figures based on this calculation? What sort of factors affect it?

This is exactly why I want to get away from this idea of “multipliers”. The idea that there is a standard factor that you can just multiply your pension by to get your CETV is rubbish and encourages people to ignore pretty much all the important aspects of comparing a DB pension to a DC fund. The calculation is much more complicated than this. I’ll explain how it works:

The actuary looks at your accrued annual pension at the date of leaving. He then forecasts the annual pension at your Normal Pension Date (the earliest date that you can take your pension without reduction and without special consent from trustees or employer – usually 60 or 65, but some schemes use other ages too). To forecast the pension, he has to revalue it between date of leaving and date of retirement, which depends on the period between the two dates, the known revaluation to the current date (e.g. past experience of inflation) and assumed revaluation in the future (e.g. an assumption about future inflation) for the remaining period. He then has an estimate of the annual rate of pension payable from the date you’re expected to retire.

The actuary then considers each future pension payment you will receive. To do that, he estimates the probability that you will be alive to receive each payment – depending on your sex, as women tend to live longer than men, and your date of birth, as those born later tend to have a greater life expectancy than those born earlier. He also considers any death benefits that may be payable, like a five-year guarantee or a contingent spouse’s pension (which in turn requires assumptions about whether you have a spouse, whether that spouse will be alive when you die, and how long they will continue to live after you die). And he has to take into account how your pension will increase in payment – again, this usually requires assumptions about future inflation. Once he has an estimate of each future expected cashflow, he can discount each one back to the point of retirement, using the expected investment return on the assets held by the scheme in respect of pensioner members (which may be different to the expected investment return on the assets held in respect of non-pensioner members). Oh, and some general assumptions are made about the scheme’s overall mortality experience, which may be different depending on different populations (e.g. an investment bank’s mortality experience may be different to a mineworker company’s mortality experience).

In practice, the process of forecasting each cashflow from retirement and discounting it back to retirement is frequently done using “annuity factors” – the actuary will have a calculator that models this process and spits out a number that represents the sum that has to be held by the scheme at the point of retirement to fund each pound of the annual pension payable thereafter. This can be considered a "multiplier" if you like, but it is hugely scheme- and member-specific, as it depends upon:

• the age at which members are expected to retire,
• the individual member’s date of birth, affecting his mortality assumptions,
• the sex of the member, affecting his mortality assumptions,
• the likelihood of the member having an eligible spouse at death, and her assumed mortality,
• the overall mortality assumptions for the scheme,
• the frequency of pension payments,
• whether pensions are paid in arrears or advance,
• the expected level of pension increases paid during retirement,
• the expected investment return on pensioner assets during retirement, and
• whether any additional death benefits e.g. a five-year guarantee are payable.

Most individuals’ pensions are made up of different “tranches” as well, which may (for example) attract different pension increases in payment, so it is necessary to calculate a separate annuity factor for each tranche.

So the actuary multiplies each tranche by its respective annuity factor, giving him an estimate of the total amount the scheme needs to hold at the point of retirement in order to fund the member’s benefits payable thereafter. The final stage is then to discount this amount to the current date, using the expected investment return on the assets held in respect of non-pensioner members. This depends on:

• the period between expected retirement and the current date, and
• the expected investment return on non-pensioner assets.

Oh, and the expected investment return varies – it is quite often based on a certain margin over a given market metric, e.g. 20 year fixed interest gilt yields, which can themselves fluctuate massively from day to day – particularly when a Brexit-style event happens.

So in short, it isn’t simple and you can’t estimate your own CETV without taking all of the above into account and knowing all the assumptions that the trustees have set (based on expert analysis and advice from the actuary). You can get a CETV quotation for free once a year from your scheme administrators between leaving the scheme and retiring. In order to decide whether you want to transfer, you should consider what kind of income you can realistically achieve by investing the CETV elsewhere and drawing it down or purchasing an annuity, as well as broader considerations about what kind of income you would actually like in retirement, how well you can tolerate risk, what type of death benefits you might like to leave, and whether you have a solid reason to suspect your life expectancy will be substantially different to the average.

PensionTech

I forgot the original reason I was going to answer this thread:

When the scheme was down to really numbers could they not set out winding it up if its was still solvent by offering lump sums, offload their responsibilities with an insurance company etc?

Which still doest answer what to do if there was money left after that. Give it to the PPF????

If the sponsor is still in existence (which it usually is, unless the scheme has entered the PPF already) and has enough money to buy out the scheme or otherwise discharge liabilities in full, then the surplus will usually go back to the employer - in fact there are provisions to allow a surplus to go back to the employer even while the scheme is being run as a going concern, provided that the scheme is fully funded on a buyout basis. But if the scheme is fully funded on a buyout basis then one would tend to actually go into buyout anyway.

If the sponsor has somehow become detached from the scheme but the scheme has not gone into the PPF - and I think the circumstances in which that could happen are extremely limited, e.g. an RAA - then I don't know what would happen to a surplus. But in an RAA you're extremely unlikely to end up with a surplus anyway.

fifeken

PensionTech wrote: »

Then I suggest you read my post #10 which explains why this “measure” is misleading. <snip>

Thanks for the detailed response. Given the complexity of the calculations would a suitably qualified IFA have sufficient knowledge to give an accurate recommendation of whether it's to one's advantage to transfer out or not, or are there just too many variables? It sounds like there could be numerous different results, and you won't know the best until it's too late.

sandsy

fifeken wrote: »

Thanks for the detailed response. Given the complexity of the calculations would a suitably qualified IFA have sufficient knowledge to give an accurate recommendation of whether it's to one's advantage to transfer out or not, or are there just too many variables? It sounds like there could be numerous different results, and you won't know the best until it's too late.

The advisers are required to take account of all the factors referenced by PensionTech in the analysis of the potential transfer. Software has been developed which pulls in all the information from the DB scheme, including different slices of benefits with different revaluation rates and indexation in payment, the lump sum, spouse's benefits, time periods etc and compares it against the cost of replicating the benefits of a personal pension scheme. Most of the software goes further these days and can also look at other more flexible ways of taking income from a personal pension such as drawdown options.

Also the advice has to be provided or checked by a specialist in this area - someone who has taken specialist qualifications in the area of advising on pension transfers.

Joey_Soap

Regarding what happens to a pension fund when the last member dies -

I understand the very large National Coal Board scheme will return assets to the government as it was a nationalised concern when the last ex miner passes away.

I am an ICI pensioner - The large ICI pension fund that was closed some time ago, reverts to the Dutch company Akzo Nobel who bought the rump ICI business after most of the other ICI businesses had already been divested. To be fair to AN, they are continuing to pay into the fund to reduce the fund deficit. None the less, in a few decades time, they will receive a handsome windfall when the last ICI pensioner expires.

Malthusian

Interesting but it doesn't answer the mystery as to what happens when there is no sponsoring employer. In the case of NCB the sponsoring employer is the government, and in ICI the employer is Akzo Nobel. Based on the OP's posts there is no sponsoring employer as it has ceased trading. That's unusual (normally it would have gone into the PPF already) but that's what we've been told.

As discussed above there is no reason to assume there will be a large windfall for Akzo when the last ICI pensioner expires, given that at the moment there is a deficit which they have to pay into. If the scheme ever does reach a surplus they will probably palm it off to an insurance company immediately, to avoid the risk of having to make further contributions if it goes back into deficit.