Help me understand personal pension “Final Bonus” range of possibilities

On-the-coast

One of my pensions is a relatively small DC pot that I contributed to for a few years in the 90’s. It was contracted out of SERPS – so it has two elements, the bit I paid in to, and the bit the government paid in, but I think my question is applicable generally to both parts (which are tracked separately in my statements). Both parts have a GAR, so I’m pretty much determined to let them run to conclusion and take them as an annuity at NRD.

It was originally CIS, but now manged by Royal London.

I’m very happy with the performance measured by Transfer Value.  I get a statement every birthday whether I ask for it or not… and there’s no way for me to meddle with the investment mix unlike more modern pensions I hold.

Each year the policy valuation explainer says that:

The Guaranteed Minimum Pension Pot is “the minimum pension pot available to you at your chosen retirement date. It includes the total annual bonuses we’ve added to your policy but doesn’t include any final bonus we may add.”

And

“At your chosen retirement date, we aim to add final bonuses to your policy so that, in total , your basic pension pot plus annual bonuses and any final bonus gives a fair total fund value. We guarantee that this fund value will be at least as much as your basic pension pot plus the total of any annual bonuses we’ve added.”

The thing I’ve never really understood is the variance between the Transfer Value – which keeps on going up, generally by quite a bit better than inflation, and the “Guaranteed Minimum Pension” (including annual bonuses so far), which has always been a lot lower than the TV (around half of TV).

E.g (using very round numbers)

£30000 Transfer value today (also the sum I’d get if I died today…)

£15000 Guaranteed minimum pension pot at NRD (circa 10 years away), made up of £13000 Basic Pension Pot + £2000 Annual Bonuses to date.

I’m guessing that the Final Bonus will make up the difference, and therefore has a pretty high probability of coming in at or above target? Otherwise the transfer value would be much lower by my logic.  Or else the annual bonuses are expected to increase in the last few years of the pension growth phase.

What are the circumstances in which the Final bonus could be much higher or much lower than currently anticipated? Can or should i trust Royal London to deliver... and why should they (since it's an old policy...)

Thanks for your insights.

tacpot12

I can say that you can trust RL to treat you fairly, i.e. to honour the terms of the contract. I used to work at CIS and dealt with RL during the transfer of the CIS business to them, and had insight as to how they were intending to treat the customers coming to them. The fact it is an old policy doesn't matter. You will get a final bonus that is determined by a calculation that reflects the actual performance of the underlying investments over the period you have effectively held them.

It's unfortunate, but this investment model is pretty opaque. However, I would trust Royal London to do the right thing for its customers. 

They won't be making any assumptions about the level of annual bonuses that will be paid in future, so your transfer value is made up of your contributions, your annual bonuses to date, and the final bonus that you have already earned (but not been credited with). They might claw some final bonus back if the market has experienced a strong downturn at exactly the point you reach your chosen retirement date, but the situation would have to be pretty dire for them to do so. They wouldn't do it normally, but might have done so at the worst point in the Covid Pandemic, and definitely would have done so at the worst point of the financial crash in 2008.

I think you can reasonably confident that the pension will pay out a bit more than £30,000. How much more will depend on the performance of the investments.

On-the-coast

Thank you @tacpot12 - useful to hear back from someone who worked in CIS.
It's interesting to know that the TV as of now also includes "the final bonus that you have already earned (but not been credited with)" 
I agree that the investment model is "opaque"... just like my endowment policies that also started with CIS, and actually did quite decently in the end (thanks to the final bonus). 
I've no reason to doubt Royal London particularly... my "can you trust" was probably more aimed at the industry in general, but thanks for affirming that RL will do the right thing for their customers.

dunstonh

 Both parts have a GAR, so I’m pretty much determined to let them run to conclusion and take them as an annuity at NRD.
It was originally CIS, but now manged by Royal London.

Have you checked the GAR offered?

CIS GARs were not that attractive. Indeed, the former protected rights GAR is often lower than the open market option rate.

The Guaranteed Minimum Pension Pot is “the minimum pension pot available to you at your chosen retirement date. It includes the total annual bonuses we’ve added to your policy but doesn’t include any final bonus we may add.”

A small number of legacy pensions do have a minimum guaranteed pension fund at the original scheme age.  For some, that is where the real value is.  Consequently, you often find providers put little or no bonus on the pension as it will never make up that higher guarantee.    

The thing is to be careful with wording as some providers use their minimum balance possible and call that the guaranteed minimum pension fund despite it being a different scenario to the one where there is a higher value.

The thing I’ve never really understood is the variance between the Transfer Value – which keeps on going up, generally by quite a bit better than inflation, and the “Guaranteed Minimum Pension” (including annual bonuses so far), which has always been a lot lower than the TV (around half of TV).

In your case, the guaranteed minimum pension is not the attractive version.    With Profits funds cannot pay less than their unit price of unitised with profits or the sum assured plus annual/reversionary bonuses (for older versions).    The final bonus is variable and could drop to zero but cannot go below zero (at scheme age).

What are the circumstances in which the Final bonus could be much higher or much lower than currently anticipated? Can or should i trust Royal London to deliver... and why should they (since it's an old policy...)

RL can be trusted.  However, the basic returns are not down to them.  Markets will do what markets do and RL cannot influence them.      RL haven't yet sorted out all CIS issues but they are working on it.     RL (ex Scottish Life) is much better than RL (CIS) for example but it takes many years to bring legacy company books bought up to the same standard.   RL is a bit old fashioned in the way it does things from a software point of view but they very good in other respects.

The final bonus will go up if markets go up and down if markets go down.  It is as simple as that.

On-the-coast

Thanks @dunstonh
I have checked the GAR... as far as I can ascertain the GAR adds genuine value, but I'd appreciate a cross-check.
Because of the pessimistic growth forecasts mandated in valuations, my forecast pension value at NRD (circa +10 years) is less than my TV.

TV is exactly £42.1K (combining both elements of pension
Value at NRD "could be" £37.6K (combining both elements of pension) according to my latest statement.
The statement also says:

• With GAR £37.6K could buy an annuity of £1995 pa, indexed at 2.2%, with spousal pension of 32% (I've combined both the SERPS and non-SERPSerps forecasts with varying indexes and spousal pension to get that average)
• Without GAR £37.6 could buy an annuity of £1275 (same index and caveats as above)
• £1.995/£37.6 ~5.3% seemed a decent annuity rate to me (even at that 2.2% indexation average figure)

If the GAR wasn't worth much, I might consider taking the TV and putting that pension elsewhere (e.g. into my company's L&G DC pension) where I could lock in that TV, and then not worry about "Final Bonus" magic

I agree the Guaranteed Minimum Pension is not attractive. I've always looked at it (each year) and thought it would be highly dissapointing to end up with the minimum after watching the TV climb over the years. 
BTW the TV has grown 268% in last 12 years (8.55% compounded), and 215% in last 10 - which seems acceptable to me.