BTPS valuation decreased significantly - is this right?

dpetherick

Hi, I wondered whether any of you with a BTPS pension (that you haven't taken yet) have noticed a significant decrease in its value over the last few months? A family member received a valuation from their spouse (soon to be ex) and it was then stated a few months later that it had decreased in value by well over 1/3rd. This seems very strange to me! I find it hard to believe that one of the biggest pension schemes in the UK could lose so much in value. If you are in the same scheme and keep a close eye on its value have you noticed the same? Many thanks.

Albermarle

BTPS is a defined Benefit scheme ( sometimes referred to as a final salary scheme) . The employees build up rights to a guaranteed pension income when they retire, based on their salary and length of service. This pension promise will not have dropped by one third , or at all.

I suspect the figure your family member is referring to is a Cash Equivalent Transfer Value ( CETV) - this is a sum the scheme will pay you to leave the scheme and give up the pension. It varies quite a lot and is dependent on financial market factors. It is actually pretty difficult to go ahead with any transfer and is normally not recommended as a guaranteed income increasing with inflation in retirement is very valuable. You could call it almost a theoretical figure.

So in reality this figure is probably not very meaningful. What is important is what pension the ex has built up for when they retire and how your friend can ensure they get a share of that .

Unless I have got the wrong end of the stick !

biscan25

Is this a DB scheme? All transfer values would have realised a large fall in nominal value.

Do you have rough dates? Making some heroic assumptions about the dates and your family member's age,
20 year gilt yields are about 3% today, in January that was about 1.2%.
So the change in interest rates alone translates to (1.03/1.012)^20-1  = 43%, minus some inflation impact (not much).
So thoroughly believable. 

dunstonh

Hi, I wondered whether any of you with a BTPS pension (that you haven't taken yet) have noticed a significant decrease in its value over the last few months?

I take it you are referring to the CETV?  If so, then yes. Pretty much every DB pension has seen its CETV fall by 25% before August and now heading towards 30-35% and will continue to do so for a while.

A family member received a valuation from their spouse (soon to be ex) and it was then stated a few months later that it had decreased in value by well over 1/3rd. This seems very strange to me!

Nothing strange about it.  It is all logical and correct.

I find it hard to believe that one of the biggest pension schemes in the UK could lose so much in value.

It hasn't lost value.   DB pensions do not work that way. 

Gilt yields heavily influence the calculation for the CETV.  Over the last 9 months, gilts have been losing value, pushing up the yield.  The higher the yield, the lower the CETV becomes.

The chart below shows you broadly how gilt prices have performed since 1995.

What you are seeing in that chart is interest rising slightly in the early noughties (this pushed gilts prices lower and CETVs fell).  Then after the credit crunch, interest rates dropped and with quantitative easing, the price of gilts continued to rise to bubble levels.      CETVs effectively rose by a similar level .  However, Gilts lose value when inflation is high or when interest rates are rising.  When both are happening and fast, its a perfect storm for a once-in-a-generation level loss on gilts.

As mentioned, as gilts go down in price, the yield goes up.  So, the cost of funding the income required becomes cheaper.   So, if you look to transfer out, they don't need to pay you as much on the CETV. 

tigerspill

the BTPS is currently under funded.  Will these recent changes in values decrease the value of the scheme and hence increase the deficit?  

biscan25

tigerspill said:

the BTPS is currently under funded.  Will these recent changes in values decrease the value of the scheme and hence increase the deficit?  

It depends.

So a brief summary of how a scheme is funded. Schemes future liabilities are assessed by an actuary, and are basically the present value of the cash flows of paying every member's pension in the future. The cash flows are 'discounted' back to the current date using an interest rate. So as interest rates rise, the liabilities actually go down.

Now considering assets, as interest rates rise, matching assets such as gilts and bonds go down, in almost exactly the same way as the liabilities. Other assets such as shares are much less linked to interest rates, so don't move much.

So if liabilities have fallen more than the assets, the funding level of the scheme will improve and the deficit will go down.

For BTPS, they will have hedged a large amount of the interest rate risk, so that assets and liabilities move in the same way, but not necessarily all. If they are 100% hedged, then the funding level will not change, all else being equal. But more likely, as is in the case for all the schemes that I advise, the funding level would have significantly improved, as liabilities have gone down more than the assets.

dpetherick

Many thanks to everyone for taking the time to reply, and explain! Yes, it's a CETV as part of a divorce settlement. Sadly it looks like the timing hasn't been good to support the member of my family in their retirement.  Thanks again. 

dpetherick

Albermarle said:

BTPS is a defined Benefit scheme ( sometimes referred to as a final salary scheme) . The employees build up rights to a guaranteed pension income when they retire, based on their salary and length of service. This pension promise will not have dropped by one third , or at all.

I suspect the figure your family member is referring to is a Cash Equivalent Transfer Value ( CETV) - this is a sum the scheme will pay you to leave the scheme and give up the pension. It varies quite a lot and is dependent on financial market factors. It is actually pretty difficult to go ahead with any transfer and is normally not recommended as a guaranteed income increasing with inflation in retirement is very valuable. You could call it almost a theoretical figure.

So in reality this figure is probably not very meaningful. What is important is what pension the ex has built up for when they retire and how your friend can ensure they get a share of that .

Unless I have got the wrong end of the stick !

You have the right end of the stick! But looking at a transfer from btps to the family member's pension.  An option of accessing pension when the ex takes it hasn't been explored as far as I know but would lead to all sorts of future complications!

Marcon

Albermarle said:

So in reality this figure is probably not very meaningful. What is important is what pension the ex has built up for when they retire and how your friend can ensure they get a share of that .

Unless I have got the wrong end of the stick !

You may have, slightly. You're talking about earmarking, which these days is rare - pension sharing is the norm for both DC and DB schemes. The CETV does matter for sharing orders, because the figure to be divided is what gets 'shared', not the prospective DB pension.