Pension Revaluation of deferred pension

Pat38493

Hi - when actuaries revalue the pension forward to calculate the pension based on a deferred DB scheme, based on either RPI or CPI - how do they do this?  Do they do this by applying annual rates, or monthly rates or what?  Also where do they get the rates from - is there an official place where you get them from?

Also - if your deferred pension contains different tranches like "Pre 6th April 1997" and "6th April 1997 to 30th April 2002", would each of those tranches be revalued independently base don the last date of that tranche or does it all get revalued from the overal pension deferral date?  I would guess it should be the former?

Marcon

Pat38493 said:

Hi - when actuaries revalue the pension forward to calculate the pension based on a deferred DB scheme, based on either RPI or CPI - how do they do this?  Do they do this by applying annual rates, or monthly rates or what?  Also where do they get the rates from - is there an official place where you get them from?

Depends on the individual scheme and the dates of active membership. Some don't 'revalue forward' unless the member is within a year or so of reaching the scheme's retirement age.

There is no 'official place' to get future rates from, because nobody knows what they will be if they are linked in some way to inflation, and most schemes will be. Although some have fixed rates on the whole pension, that's very unusual. The Guaranteed Minimum Pension element (assuming you have one), may well revalue at a fixed rate - but doesn't mean any pension in excess of the GMP revalues at the same rate.

You'd need to ask your scheme what they do.

Pat38493

Marcon said:

Pat38493 said:

Hi - when actuaries revalue the pension forward to calculate the pension based on a deferred DB scheme, based on either RPI or CPI - how do they do this?  Do they do this by applying annual rates, or monthly rates or what?  Also where do they get the rates from - is there an official place where you get them from?

Depends on the individual scheme and the dates of active membership. Some don't 'revalue forward' unless the member is within a year or so of reaching the scheme's retirement age.

There is no 'official place' to get future rates from, because nobody knows what they will be if they are linked in some way to inflation, and most schemes will be. Although some have fixed rates on the whole pension, that's very unusual. The Guaranteed Minimum Pension element (assuming you have one), may well revalue at a fixed rate - but doesn't mean any pension in excess of the GMP revalues at the same rate.

You'd need to ask your scheme what they do.

I didn't explain that very well - what I meant was, what data do they use to revalue the parts where time has already passed and the data is available.

For example if my pension was deferred in 2008 and I retired in 2034 at 65, the data would be available to calculate the pension up to that date.  Even if I asked for an estimate, the historical data would be available up to now, and then they would have to use the estimated future rate.

I have some data about my DB scheme.  It was deferred in 2008 and I joined in 1991.

The GMP has recently been thrown out and replaced with a corrsponding revaluation.

They have sent a document that splits the pension into 3 different tranches with corresponding retirement dates per tranch and post pension growth rates.  The revaluation for post deferral is stated as "RPI until 2010 then CPI capped 5%".

Each of the tranches applies to different periods of contributions and one of them has a retirement date 60 instead of 65 (not sure why because as far as I know, my retirement date was always 65, but I think it's something to do with court cases about gender discrimination).

The pension factsheet states that the revalaution is by value forward to NRD, then apply ERF.

Sandtree

You need to look at the nuts and bolts of the scheme rules. Indexes are published by the Office for National Statistics and the rules will say which month its applied in and which months rate is used. Given you are compounding over a fairly long period there is also often consideration to the rounding rules and how many decimal places are used. 

My experience is significantly more on the (deferred) annuity side than DB pensions but when a scheme wants a buy-in/buy-out all these things need to be clarified so the insurers can model and price the deal correctly. 

Certainly insurers will value deferred annuities forward because they are required to do so for capital reserving purposes. For this sort of thing they will have their own predictions on indexes (as well as longevity etc) and this is the real bit that the actuaries get involved in... revaluing a pension based on actuals is more an Operations job

Bimbly

Is this what you mean?

https://www.ons.gov.uk/economy/inflationandpriceindices

Pat38493

Bimbly said:

Is this what you mean?

https://www.ons.gov.uk/economy/inflationandpriceindices

Probably yes if this is what they use, although as mentioned above I guess you have to know the scheme rules for how it’s actually applied.

hyubh

Statutory revaluation of excess is using so-called section 52a orders. An often quoted reference on this board, but the following article explains it well:

https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/

Reading that, you may notice the slightly funky implications of the end-to-end lookup (i.e. what point during the year you draw your benefits matters). That said, schemes can use better than statutory, and public sector schemes don't technically revalue at all (instead, they apply year-on-year pension increases from leaving, with an initial part year increase). Some private sector schemes do the same, particularly if they intentionally aped public sector schemes (e.g. USS).

Pat38493

hyubh said:

Statutory revaluation of excess is using so-called section 52a orders. An often quoted reference on this board, but the following article explains it well:

https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/

Reading that, you may notice the slightly funky implications of the end-to-end lookup (i.e. what point during the year you draw your benefits matters). That said, schemes can use better than statutory, and public sector schemes don't technically revalue at all (instead, they apply year-on-year pension increases from leaving, with an initial part year increase). Some private sector schemes do the same, particularly if they intentionally aped public sector schemes (e.g. USS).

Thanks for this interesting article.

It seems like it's a bad idea to take your retirement benefits on 31st December if I understood correctly.

Regarding the table in that example, it's out of date so I guess you would need to know the latest info.  Also, it says the following:

"*In the example shown, it is assumed that the Scheme has adopted CPI revaluation to all benefits and has not reduced the revaluation to 2.5% for benefits accrued post 6 April 2009."

My scheme has commented that the revaluation is "RPI up to 2010, then CPI, capped 5%".  Does this mean my scheme is using special tables better than statutory as you mention above?  

hyubh

Pat38493 said:

My scheme has commented that the revaluation is "RPI up to 2010, then CPI, capped 5%".  Does this mean my scheme is using special tables better than statutory as you mention above?  

I would read that has saying it has kept to the original statutory revaluation ('higher revaluation', i.e. capped to 5%), and not reduced to 'lower revaluation' (i.e. capped to 2.5%) for post-09 service. 2011 is just when the government switched from RPI to CPI for its preferred inflation measure, which affected statutory revaluation (amongst other things) going forward.

caveman8006

Do check this thread, as the point made about the importance of choosing whether to retire before or after the anniversary of your date of leaving service can make a huge difference to the resulting pension

https://forums.moneysavingexpert.com/discussion/5962314/rules-on-using-occupational-pensions-revaluation-orders/p1

Pat38493

caveman8006 said:

Do check this thread, as the point made about the importance of choosing whether to retire before or after the anniversary of your date of leaving service can make a huge difference to the resulting pension

https://forums.moneysavingexpert.com/discussion/5962314/rules-on-using-occupational-pensions-revaluation-orders/p1

OK but are these pension revaluation orders published somewhere?

So if my scheme was deferred as of May 31 2008, I should retire after that date as the next year after that had a lower CPI than 2008?  Or are the tables mentioned above different to the historic published CPI?

Therefore if I was planning to retire Jan 2026 for example I should delay it till June 2026?

Also - if as above, the scheme is using a more generous system, does this quirk still apply?

And from what I read in the other thread, not only are the pension administrators not obliged to point this out to you if you select a silly retirement date, they actively are not allowed to tell you?

I guess this is not an issue if you retire whilst you are still a contributing member of an active scheme like public service scheme as well?