Low and reduced CETV

fcjf

After seeing some of the DB Pension transfer value multiples referenced on this forum I enquired about my DB pension, more out of curiosity but with a slight hope that the value would blow me away and make me think about researching a transfer in more detail.
The DB pension in question ceased in April 2009 and the statement I received provided the following information;

Current annual benefit of £21,265 with provisions for my dependants.
Transfer value of £288,122.
The transfer value had been reduced by £93,488 as there ‘are insufficient assets to meet the scheme liabilities and the trustees have taken the advice of the scheme Actuary that the transfer values should be reduced’.

If the scheme had been fully funded I assume that the transfer value would have been £381,610 which is just under 18x the annual benefit? The last pension update I received noted that the Scheme was 67% funded and that there was a programme of increased annual company contributions to bring the scheme back to fully funded by 2022.

Clearly the CETV isn’t worth even considering and confirmed my view that a mix of DB and DC would provide the best long term solution for my pension requirements.

I now have £150,000 in the DC pension (with the same employer as my DB), I am 47 years old and paying a combined 25% of my salary into it the DC scheme so will hopefully have a good pension available in my early 60’s.

A couple of questions for the more experience on here;
Should the value of the CETV provided and level of under-funding of the DB pension scheme raise any concerns about the long term health of the pension scheme?
Is there a correlation between the current funding of the scheme and the reduction of the CETV (the percentages aren’t the same on the face of it)
What economic factors can influence the value of the CETV?

PensionTech

1. Not necessarily. Plenty of schemes are underfunded. It's really the employer covenant - i.e. the ability and willingness of the sponsoring employer to meet the liabilities of the scheme - that matters. There are schemes that are relatively well-funded, but then the company fails and there isn't enough money to get the scheme bought out so it goes into the PPF; there are other schemes that are relatively ill-funded in the short term but the employer is strong enough to put more money in if push really came to shove and the scheme needed a top-up to be able to actually pay out the pensions as and when. Keep an eye on the health of the company. It's encouraging that they've set a rather short recovery plan - that suggests the employer is committed to pouring money into the scheme to fix the problem quickly.

2. Schemes can be valued on a number of different bases, using different assumptions. The 67% is the "technical provisions" basis that has to be calculated by law using prudent (i.e. pessimistic) assumptions. That's what the recovery plan (extra employer contributions) is based on. The CETV reduction is based on a valuation on a CETV basis, which uses "best estimate" (i.e. realistic) assumptions and is therefore slightly less onerous. The scheme will therefore be better funded on a CETV basis than a technical provisions basis, so the reduction to your CETV will be less than the 33% deficit on the TP basis.

3. Primarily gilt yields. It depends how your scheme sets its discount rates, but most assume some kind of link to gilt yields. Also inflation expectations. This is why CETVs have generally increased since the Brexit announcement: a) gilt yields have gone down and b) future inflation expectations have gone up, each of which results in a higher present value of the expected cost of benefits to the scheme.

Malthusian

fcjf wrote: »

Should the value of the CETV provided and level of under-funding of the DB pension scheme raise any concerns about the long term health of the pension scheme?

Not on the face of it. The scheme is under-funded only based on certain assumptions which have never been less favourable. If gilt yields go up or if people die quicker than expected the scheme may suddenly become fully funded again. Normally in finance it is best to be pessimistic, however in this case you are protected from any downside risk because as you've noted, the company has to pay contributions into the scheme. And if it can't do so it will go into the Pension Protection Fund. You said that the CETV clearly isn't worth considering and presumably that wouldn't change even if you took into account the 10% cut to benefits under the PPF.

Is there a correlation between the current funding of the scheme and the reduction of the CETV (the percentages aren’t the same on the face of it)

Yes, but only the actuary would know what the exact formula is. Let's say the scheme was 50% under-funded so they cut all CETVs by 50% and 50% of the scheme membership transferred out. Would the scheme's assets and liabilities be cut by 50% across the board so it remained 50% underfunded? Obviously not, as those who chose to transfer would be more likely to be richer, have longer to go until retirement and not have a spouse; on the other hand those whose pensions were already in payment could not transfer out at all. So there will be some sort of complex formula at work.

What economic factors can influence the value of the CETV?

Assumptions on future investment returns, inflation and interest rates. And don't forget that there are equally important factors which aren't economic in nature, i.e. the age profile of the scheme's membership. Every scheme is different which is why CETVs can't necessarily be compared from one DB scheme to another.

fcjf

Thank you both, put my mind at rest.