CETV Valuations going forward

talby

I've recently got a CETV valuation on a deferred final salary pension I have with my old company (large multinational). They finally got round to setting up an automated system online and I've been using it frequently. At the beginning of August, the valuation was £480k but this jumped up to £503k at the beginning of September and now has jumped again to £522k currently, which is 40 times the unreduced pension value at 60 (my normal retirement date is 65 but I can take the pension unreduced at 60, and with an actuarial reduction of 9.3% at 55).

Can anyone hazard an educated guess as to why these numbers might have jumped by £42k since the beginning of August ? What factors might influence them ?

They are sufficiently high for me to investigate transferring to a SIPP. I am 53 and single with no dependents as such but a desire to leave the money to relatives abroad if I die, and have other pensions and investments of about £600k as well as a house worth £450k, and another small pension of £5k pa in payment, and I've been retired for 2 years already. I think a transfer is well worth investigating for a number of reasons. However is it worth waiting longer to see if the transfer value rises ? Or has it probably peaked ?

I'm thinking in particular that if there's an interest rate rise at the beginning of November that this could well affect the CETV value downwards again.

I've been struggling to understand what factors influence CETV values. As an aside I found an interesting comment from the poster jamesd in thread 5680341 at post 20 (sorry I can't post a link) alluding to possibly holding fire on a DB pension transfer as stock markets are at high values, but I suppose I could transfer out and leave it in cash or defensive assets for a while but that's another question.

Thanks in advance for any thoughts anyone may have.

Kind regards
Talby

Sarastro

Devaluation of the pound because of Brexit inflates the value of the FTSE, which is what a lot of your pension will be invested in. Continued uncertainty may mean this factor remains, goes away or gets worse - who knows! In the short-term this is probably more of a factor than interest rates; they will go up probably not dramatically in the short-term.
Traditional wisdom is that Final Salary Schemes are better, but that is not always so. You have to decide if you can manage a SIPP in such a way that the pension you derive from it will be more than the defined benefits. You have a 'head-start' because of the higher CETV now, but relatively few years (sorry) to make a massive difference if you did want to start drawing an income from it later on.
Wouldn't staying in the defined benefit scheme mean that you are more protected from fluctuating pension fund value?
Also, you will need to get into the detail to see if you can leave the money to relatives as there are different rules for different schemes about who can inherit what when you die.
I would get yourself a good independent financial adviser.

bigadaj

Sarastro wrote: »

Devaluation of the pound because of Brexit inflates the value of the FTSE, which is what a lot of your pension will be invested in. Continued uncertainty may mean this factor remains, goes away or gets worse - who knows! In the short-term this is probably more of a factor than interest rates; they will go up probably not dramatically in the short-term.
Traditional wisdom is that Final Salary Schemes are better, but that is not always so. You have to decide if you can manage a SIPP in such a way that the pension you derive from it will be more than the defined benefits. You have a 'head-start' because of the higher CETV now, but relatively few years (sorry) to make a massive difference if you did want to start drawing an income from it later on.
Wouldn't staying in the defined benefit scheme mean that you are more protected from fluctuating pension fund value?
Also, you will need to get into the detail to see if you can leave the money to relatives as there are different rules for different schemes about who can inherit what when you die.
I would get yourself a good independent financial adviser.

I think you might benefit from a financial adviser.

The level of the ftse has no bearing on the value of theOPs db pension, or the cetv value he is being offered.

bigadaj

talby wrote: »

I've recently got a CETV valuation on a deferred final salary pension I have with my old company (large multinational). They finally got round to setting up an automated system online and I've been using it frequently. At the beginning of August, the valuation was £480k but this jumped up to £503k at the beginning of September and now has jumped again to £522k currently, which is 40 times the unreduced pension value at 60 (my normal retirement date is 65 but I can take the pension unreduced at 60, and with an actuarial reduction of 9.3% at 55).

Can anyone hazard an educated guess as to why these numbers might have jumped by £42k since the beginning of August ? What factors might influence them ?

They are sufficiently high for me to investigate transferring to a SIPP. I am 53 and single with no dependents as such but a desire to leave the money to relatives abroad if I die, and have other pensions and investments of about £600k as well as a house worth £450k, and another small pension of £5k pa in payment, and I've been retired for 2 years already. I think a transfer is well worth investigating for a number of reasons. However is it worth waiting longer to see if the transfer value rises ? Or has it probably peaked ?

I'm thinking in particular that if there's an interest rate rise at the beginning of November that this could well affect the CETV value downwards again.

I've been struggling to understand what factors influence CETV values. As an aside I found an interesting comment from the poster jamesd in thread 5680341 at post 20 (sorry I can't post a link) alluding to possibly holding fire on a DB pension transfer as stock markets are at high values, but I suppose I could transfer out and leave it in cash or defensive assets for a while but that's another question.

Thanks in advance for any thoughts anyone may have.

Kind regards
Talby

It's quite unusual to have an automated system for cetv values, they are generally fairly bespoke and point in time as you've found.

It seems a little odd that values have risen by a fair amount of a short time period, I'm not sure interest rate expectations or forecasts have changed much in that time. I'd contact your employer to check the figures you are using are correct.

Markets are high but that's a very high multiplier, it's basically implying that you only need a 2.5% return plus inflation to not only pay you the equivalent of the db but retain the actual pot as well.

Markets are at highs, but are frequently so, keeping some in cash and short dated bonds would be fine but you're then probably losing to inflation with little or no growth.

You mention other pensions, the other thing to consider is if this transfer will push you over the lifetime allowance and so be taxed which will make the offer less attractive.

You'll still need to get and oay for the advice for a transfer, which appears difficult currently due to the resource available and won't be cheap, could easily be £10k plus so something to factor in.

pip895

Interesting that the value is still going up - I was told by one IFA that values were beginning to slip. Perhaps he was trying to persuade me to move forward with my transfer valued last month.

My situation is different in that I have a partner and Daughter but The transfer value is similar and like you I have plenty of other assets. I have made the decision to move because even with a relatively cautious portfolio we would have to have unprecedentedly bad investment returns for the next 30 years and/or I would need to live to 100 not to be better off + I like the idea of leaving my SIPP to my Daughter.

Thrugelmir

talby wrote: »

Can anyone hazard an educated guess as to why these numbers might have jumped by £42k since the beginning of August ? What factors might influence them ?

Long term gilt yields are very low while inflation has been rising. Resulting in low investment returns and increasing liabilities.

To bridge the gap, companies are having to fund higher levels of contributions to keep schemes solvent. Scheme members transfering out reduce the scheme's long term liabilities.

Lump sum may look attractive, i.e. jam today. Finding a home for your money that wil guarantee long term investment returns linked to inflation is the challenge you face.

Cash will guarantee you a negative return at the current time.

bostonerimus

CETVs are so high because interest rates are ridiculously low and companies want to get DB pensions of their books asap. I don't know if there are any firm rules about the rates used to calculate CETV in the UK or if companies can "juice" the values to make them more attractive, maybe someone knows. But in the US CETV must be calculated using IRS segmented tables of interest rates.

Thrugelmir

bostonerimus wrote: »

I don't know if there are any firm rules about the rates used to calculate CETV in the UK or if companies can "juice" the values to make them more attractive, maybe someone knows.

The sheer sums on offer are enough to have people salviating.


"A transfer value in respect of defined benefits is calculated on actuarial principles as the capital sum which, if invested appropriately, is expected to provide the relevant member’s benefits as they fall due. The calculation requires assumptions to be made about many factors, including investment returns, mortality rates, inflation rates and the relative age of any dependant(s).
The broad thrust of the new legislative requirements is that the basic cash equivalent should be at least the best estimate of the cash required to be invested in the scheme to reproduce the relevant member’s benefits. There is provision to allow this
basic amount to be reduced in certain circumstances, including where the scheme is poorly funded."

kidmugsy

talby wrote: »

... a deferred final salary pension I have ... now has jumped again to £522k currently, which is 40 times the unreduced pension value at 60 (my normal retirement date is 65 but I can take the pension unreduced at 60, and with an actuarial reduction of 9.3% at 55). ... I am 53 and single with no dependents as such but a desire to leave the money to relatives abroad if I die, and have other pensions and investments of about £600k as well as a house worth £450k, and another small pension of £5k pa in payment, and I've been retired for 2 years already.

If the scheme is prepared to let you retire 10 years early (55 vs 65) with a penalty of only 9.3% then I suppose it would have quite an incentive to get you off the books by offering a high CETV.

Two things to check:

(i) would the £522k put you anywhere near problems with the LTA? Your existing pension has presumably used approx £100k (plus any TFLS that it paid): what is the value of the other pensions within the category "other pensions and investments of about £600k"?

(ii) What is the tax position of your foreign relatives if you ask your SIPP provider to pay the remaining pension pot to them on your death?

talby

Many thanks for the replies everyone- it's very much appreciated.

The suggestion that it could be inflation which has led to the increase in CETV could well be a factor. It could also be a bug in the system as mentioned so I'll certainly check with the pensions administrators for gremlins. It's a new system introduced to provide illustrations but these are non binding and we need to formally request a CETV valuation to proceed (one free per year).

My current pensions are worth about £160k so together with the pension in payment (LTA equivalent of £128k) this takes me to £810k so currently within the LTA limit.

The pension scheme is very healthy and in surplus currently. Also the 9.3% actuarial reduction is low because I was made redundant 2 years ago so got better terms. The scheme only allows me to leave it to dependents or a spouse or civil partner so since I don't have any of those I'll be looking to leave it to relatives in Jordan and possibly also Melbourne - I'm not sure how this would work in practise though and of course I'll be looking to leave other non-pension assets to them also when I die.

I'm happy to run the pot down as well so capital preservation is not an issue at this time. I'm using retireeasy and cfiresim to help me with my analysis and modelling.

I also read elsewhere on this board and elsewhere that IFA advice regarding final salary transfers is likely to be modified to allow more realistic advice in Q1 2018 so I was going to wait for that - but now I'm tempted to get the ball rolling now to make sure I get a good valuation in case interest rates do go up on November 3rd .... I've made too many financial mistakes in my life and I don't want to make another over this potentially life changing sum.

Thanks again for all the responses
Regards Talby

GSP

I was able to obtain the figure on a daily basis from a Willis Towers Watson system. Between March and May it rose, then gradully slipped down to when I transferred out in July so took May's high figure.

Interesting as your numbers are still rising and not to say mine would have gone back up again, but shows the different figures are not uniform. Why they have, not a clue.