Why is my DB pension less than the value of an Annuity that the transfer value could buy?

Pipthecat

I have a small company DB pension due at 55 and was looking at options such as transferring it to my SIPP.  In the end I concluded I would be better off having assurance of this small guarantee and so should do nothing (especially given the faf and expense of trying to transfer). However it threw up a real oddity.  The company pension increases at 2.5% and comes with 50% joint benefit.  What I don't understand and maybe someone can help me understand is why the transfer value would be high enough to let me buy an annuity with the same benefits for almost a third more?

Here is what I mean. 
Current best buy annuity aged 55, 3% and joint cover costs £3,253 per £100k.  
Company pension aged 55, 2.5% and joint cover works out at £2,500 per £100k transfer value

Am I missing something obvious here?  Are company schemes generally less generous or is this just the market rate fluctuating?

zagfles

When did you get the transfer value? If it was a year+ ago, it'll have probably fallen a lot, as interest rates/annuity rates have risen.

Linton

 - The difference between 2.5% and 3% is significant.  Are those %s index linked caps or fixed?  As a guess the 2.5% is an inflation  cap whereas the 3% is fixed.  Therefore the actual average annual rise in the DB payments will be less than 2.5% whereas the annuity would always increase by 3%.

 - Over the past year annuity rates have increased significantly and DB transfer values fallen significantly..  So you need to ensure you are looking at data.for the same date.

dunstonh

I don't understand and maybe someone can help me understand is why the transfer value would be high enough to let me buy an annuity with the same benefits for almost a third more?

They are not meant to align.  Commercial rates, health etc can all impact on annuities but not with CETVs.

There is also a lag in data feeding into different systems.  Annuities are falling again but it may take some sites time to update their data.  And CETVs may use data based on a date snapshot.

Pipthecat

Thanks it could well be the transfer values being dated.  It's 10m months old. 

Marcon

CETVs reflect a number of things, not least the scheme's own investment strategy. The CETV reflects the estimated cost to the scheme of providing the promised benefits.  

Although certain financial market movements will be factored in to the CETV calculation, schemes don't always regularly update the underlying method for calculating CETVs. 

Pipthecat said:

Am I missing something obvious here?  Are company schemes generally less generous or is this just the market rate fluctuating?

Usually the annuity would cost more for you to buy on a 'like for like' basis, because the annuity provider needs to cover their admin costs and make a profit - which is not true of the DB scheme itself.

dunstonh

Thanks it could well be the transfer values being dated.  It's 10m months old. 

CETVs halved over 2022.  So, that is going to account for the bulk of it.

Universidad

Marcon said:

The CETV reflects the estimated cost to the scheme of providing the promised benefits. 

If my former pension scheme had been as optimistic about their performance over time when offering benefits, as they were when giving me my CETV, I probably would still be in my old job!