Pension transfer dropped by 300k in 10 months

Blackcat1una

Hi there I am going through a divorce and my husband wanted to transfer one of his company pensions to me as financial settlement which started out last April at £633k
which has now dropped to £333k
we are told it is all down to interest rates etc, we are totally shocked and even our financial advisor is list for words. Please any advice you could give would be much appreciated. 

Ayr_Rage

Unfortunately it is what it is and there is nothing you can do to change a CETV yourself.

You will need to revisit your financial settlement arrangement accordingly.

Have a search for these keywords "pension transfer value index"

Brie

Presumably this is all invested money?  If so the investment will rise in value as the market changes direction.  

But I agree you might want to look again at the financial settlement.

Dazed_and_C0nfused

Blackcat1una said:

Hi there I am going through a divorce and my husband wanted to transfer one of his company pensions to me as financial settlement which started out last April at £633k
which has now dropped to £333k
we are told it is all down to interest rates etc, we are totally shocked and even our financial advisor is list for words. Please any advice you could give would be much appreciated. 

Is it a DC pension (pot of money) or DB (final salary/CARE)?

Blackcat1una

It is a DB 

Linton

Is this pension Defined Benefits (eg final salary) or Defined Contribution where there is a pension pot holding investments?  I will assume it is DB.....

The transfer value of a DB pension is based on the cost to the pension company of providing the pension.  Pension companies finance the payment of pensions by investing in Government Bonds, "gilts".  In the past 12 months long term Gilt interest rates have risen from from 1.7% to 4.2%.  So the pension company has to invest much less money now than a year ago  in order to pay for the future pension.  Thus a large drop in the transfer value.

There is an index available of average transfer values https://www.xpsgroup.com/what-we-do/technology-and-trackers/xps-transfer-watch/xps-transfer-value-tracker/.  This shows an average drop of about 30% since end of March last year.   But we dont know exactly when your values were calculated. If you look at the graph you will see that transfer values have been very volatile - a few days can make a significant difference.

As to what to do - that is why you employ a financial advisor.  Is the financial advisor a qualified regulated IFA?  Whether it is possible to ask for a transfer value again in a few weeks/months time or simply ask the pension company to review the numbers I dont know.

If it is an invested DC pension can you let us know together with some information as to what it is invested in.

dunstonh

we are totally shocked and even our financial advisor is list for words

Either your financial adviser is rubbish or he is just humouring you.

I am going to assume its a DB pension as the fall is consistent with DB pension CETVs and too high for invested DC pensions (unless your husband was really bad at investing and lost double the typical losses seen in 2022).

CETVs fell around half over 2022 for well-documented reasons.  Any adviser that does not know that isn't really an adviser.  Perhaps he is a sales rep of an insurer/provider.

Please any advice you could give would be much appreciated. 

Nothing you can do about it.  The calculation for Defined Benefit CETVs uses gilt yields.    The higher than gilt yield, the lower the CETV is (and vice versa).    After the credit crunch, quantitative easing (QE) started and this pushed gilt yields down.   So, transfer values went up.  QE went on for longer than expected and this pushed gilt yields even lower.  So, from 2008/9 to 2021, CETVs pretty much rose year on year.    

From November 2021, gilt yields started to rise.   This was always expected to happen.  Nobody knew when it would start.  Expectation was that it would be a gradual change over years or decades (which is what tends to happen).   However, the events of 2022 created a perfect storm and pretty much the bulk of the post 2008 gains in CETVs were wiped out in less than a year as gilt yields changed at a pace not seen in over a hundred years.      

Things started to improve from the low point in October but as of late, CETVs have started to fall again.   However, CETVs are not expected to go back to anywhere near where they were before 2021 as that period was highly unusual.   They are now back in their more typical range.

Defined benefit schemes are not invested.   The CETV is not an invested value.  It is effectively the cost of covering the benefits provided by the scheme.  With Gilt yields higher, the cost is lower.

In very crude and heavily simplified terms, if the liability to the scheme was £1m and gilt yields were 1.0 then the CETV would be £1m  (£1m divided by 1).  However, if gilt yields were 4.0 then the CETV would be £250k (£1m divided by 4).     It is more complex than that but I have simplified it to help you understand the concept.

Your husband should be reconsidering whether to transfer the pension.  I assume the financial adviser is not the one handling the pension transfer as that requires knowledge and if he doesn't know why CETVs have fallen then he isn't capable for doing transfers.  It may be better that a pension sharing order is not used if the scheme offers shadow membership (i.e. they effectively split the pension but it's left in the existing scheme so you become a member with the agreed split).  This may well be the option that creates the highest value to you over your lifetime.  However, not all schemes offer it.

Keep_pedalling

As a DB pension the value to your husband has not changed he will still get the same benefits so if possible it might be better to use alternative assets and for him to maintain his DB pension in full.

MEM62

Blackcat1una said:

It is a DB 

In which case it is understandable.  The value would have fallen as the cost of providing the defined benefits afforded by the pension have dropped.  Re-visiting the settlement may not bring about any changes as your ex-husband's equivalent CETV would have dropped proportionately.    

snowlaser

Interest rates and gilt yields have both been very low by historical standards over the last 10 or so years, causing DB transfer values to be very high.  As yields returned to more normal levels over the last year or so the transfer values have reduced from those very high levels back to more usual levels.

So the drop from 633k to 333k is believable, and likely correct.

If it's not too late it might well be worth re-considering the overall financial settlement in light of the last year.  For example, house prices have also come down slightly so if there is a house in the mix that might need to be revalued too etc.

Marcon

Blackcat1una said:

Hi there I am going through a divorce and my husband wanted to transfer one of his company pensions to me as financial settlement which started out last April at £633k
which has now dropped to £333k
we are told it is all down to interest rates etc, we are totally shocked and even our financial advisor is list for words. Please any advice you could give would be much appreciated. 

It's worrying that you are coming here for 'advice' when you have a financial adviser and presumably a solicitor. They should be well placed to deal with a situation which, as dunstonh has explained above, is exactly what a knowledgeable finance professional would expect (although horrid for lay parties who are unfamiliar with the mysteries of DB pension valuations).

Where exactly are you in the divorce process? Has a court made an order awarding you 100% of this particular pension, or what?