Falling Transfer Values

Laslos

Hi all. I apologise in advance for my ignorance but I’ll consider the replies a crash course on the subject. 

So, my, ( and my colleagues), workplace, DB Scheme Transfer Value was doing nicely up until the pandemic hit. It’s been all over the place since, which is to be expected I guess. 

However, in the last few weeks they’ve tumbled to 50% of what they were! I’ve made contact with the administrators and they’ve pointed out that we shouldn’t consider transfer values our pension pot. Historically they seemed pretty aligned when one of the staff left. 

They also implied it was nothing to worry about as the scheme is insured! Presumably, as long as I work to natural retirement age, which was not the plan. So, should we be concerned? Is 50% a reasonable loss to expect in the circumstances? I’m talking about an average value of £600,000 down to £300,000. 

Qyburn

If you're planning to retire early can they give you figures for (1) early retirement and take pension immediately and (2) early retirement and defer pension to normal pension age.

Or are you set on transferring?

TheMilkmansDad

not an expert - but the transfer value of a DB is somewhat irrelevant. there are very few circumstances where you would transfer a DB to a DC where the value would be more of a concern.

Linton

Transfer values are based on the cost to the scheme of providing your pension.  This is to ensure that neither you nor the scheme benefit financially from selling the pension.

In order to pay the pensions the DB scheme buys bonds thus guaranteeing future income to pay to you.  Interest rates have risen significantly in the past few months. Therefore the scheme needs to buy fewer bonds to pay your pension which saves it money.  This is reflected in the transfer value.

Albermarle

Laslos said:

Hi all. I apologise in advance for my ignorance but I’ll consider the replies a crash course on the subject. 

So, my, ( and my colleagues), workplace, DB Scheme Transfer Value was doing nicely up until the pandemic hit. It’s been all over the place since, which is to be expected I guess. 

However, in the last few weeks they’ve tumbled to 50% of what they were! I’ve made contact with the administrators and they’ve pointed out that we shouldn’t consider transfer values our pension pot. Historically they seemed pretty aligned when one of the staff left. 

They also implied it was nothing to worry about as the scheme is insured! Presumably, as long as I work to natural retirement age, which was not the plan. So, should we be concerned? Is 50% a reasonable loss to expect in the circumstances? I’m talking about an average value of £600,000 down to £300,000. 

It does not mean that the value of the fund that supports the pension has gone down 50%. There is no implication that your guaranteed pension is under threat.

The transfer value is a figure offered by the scheme to buy you out of the scheme, and therefore the scheme does not have to provide the guaranteed pension you now have promised. Due to changes in financial markets, particularly gilt yields, this transfer value has gone down a lot from what were historic highs.

All it means is that it is even less of a good idea than it was before to transfer out. In any case you need to go through a long and expensive process with an IFA to be able to transfer out. The chance of this ending successfully has gone from pretty low to almost zero due to the big drop in transfer values.

Laslos

Qyburn said:

If you're planning to retire early can they give you figures for (1) early retirement and take pension immediately and (2) early retirement and defer pension to normal pension age.

Or are you set on transferring?

Given that the quote for early retirement with the pension is too low (I’m still mid 50’s), early retirement was only ever an option if I transferred out. Now the TV’s are half what they were, if correct, that option has also now been extinguished as far as I can tell. 

dunstonh

So, my, ( and my colleagues), workplace, DB Scheme Transfer Value was doing nicely up until the pandemic hit. It’s been all over the place since, which is to be expected I guess.

The pandemic had no impact on CETVs of DB schemes.

However, in the last few weeks they’ve tumbled to 50% of what they were! I’ve made contact with the administrators and they’ve pointed out that we shouldn’t consider transfer values our pension pot. Historically they seemed pretty aligned when one of the staff left. 

CETVs have dropped because of interest rates rising and inflation rising.   This is the perfect storm for gilt yields to rise and that reduces the CETVs.

You are pretty much seeing the complete unwinding back to pre-credit crunch levels.  

They also implied it was nothing to worry about as the scheme is insured! 

It is nothing to worry about as CETVs are based on a calculation, not the underlying assets.

So, should we be concerned?

No.  Only the CETVs (which are irrelevant if you don't plan to transfer) are subject to market influences.  Not your pension benefits.

Is 50% a reasonable loss to expect in the circumstances?

Absolutely yes.  Indeed, it could possibly get worse.  But its all to be expected.

Do not mistake how a DB pension works with a DC pension.  The CETV is only if you wanted to transfer it to another pension.  You get your defined benefits in retirement irrespective of market issues.

Laslos

With all of the answers given in mind, what would be the point in working lots of overtime, thereby increasing my pension contributions, if a) it’s designed to not to be financially beneficial for either me or the administrator and b) how is it possible to retire early if your personal pot isn’t allowed to grow? Again, thanks for all your comments and sorry if I’m missing the point of the DB scheme. 

QrizB

DB schemes pay a defined benefit - DB - when you retire. The benefit is usually defined in terms of your earned income. The actual value of the pension scheme's investments, or the calculated transfer value, is mostly irrelevant.

Working overtime increases your income and therefore has the potential to increase your defined benefit. It also increases your income today, which is the main benefit you receive.

The details of your specific scheme, and your personal circumstances, will determine whether overtime this year will affect your pension when you eventually retire, or not. With some schemes and circumstances it will; with others, it won't.

dunstonh

what would be the point in working lots of overtime, thereby increasing my pension contributions, if a) it’s designed to not to be financially beneficial for either me or the administrator

Typically, DB contributions are a contribution of your pensionable salary and overtime is not taken into account.  Although some schemes may do so.

b) how is it possible to retire early if your personal pot isn’t allowed to grow? 

Growth applies to DC pensions.  You don't have a DC pension.  You have a DB pension.   Defined benefits.  Yours is calculated by your pensionable salary and your years (and days) of service.

and sorry if I’m missing the point of the DB scheme. 

No need to apologise but yes you are.

If it defined contribution schemes that are subject to investment returns (and most people in those are down around 12-18% year to date).   You don't have one of these.

Albermarle

and sorry if I’m missing the point of the DB scheme. 

The point is it almost always better to be in a DB scheme than a DC scheme.

Typically DB schemes have to be funded with around 25 to 30% of your salary each year, to have enough money to pay all pensions they will be liable for in the future. This 25/30% could be say 5 to 10 % from you and the rest from the employer . So the employer is typically paying in 20% pa.

In a typical DC scheme the employer pays in 3 to 10%, and the employee something similar. So the pot at retirement will not be big enough to be able to generate the same level of pension you get with a DB scheme. Also as it is invested it is vulnerable to the vagaries of the financial markets.

The advantage of a DC scheme is it is a bit more flexible in how you take the ( albeit usually smaller ) pension.

So that is why some people having built up the DB pension benefits, look to transfer out at some point to a DC, but they only got to that point by being in the DB in the first place.