Pension Transfer Value

bondo

I am looking to transfer from my deferred final salary scheme to a drawdown arrangement. I am happy with the risks etc and know what I am doing in that respect.

My query concerns transfer values.

I received a transfer value quote in 9/07 from one of my schemes of £80,000. I have put the tranfer application in place and have now received in 4/08 a revised transfer value of approx £70,000.

I realise that the transfer is the monetary value to replicate the value of the benefits given up. I would have expected, that after three quarter-point base rate reductions in the intervening period, the transfer value would be higher now than last september, not lower. Surely the lower interest rates are, then the bigger the pot required to assure a given income?

Can any one shed any light on this.

Mary_Hartnell

Try the Pension Advisory Service.

The price a final salary scheme is prepared to pay to get rid of you should go up as you are nearer the date of becoming a liability of the fund.

Are you sure you are comparing like with like - they may have to keep something back to cover your "Guaranteed Minimum Pension" as you appear to be proposing a DIY solution to your retirement.

Andy_L

As I understand it the transfer value is not the (true) cost of paying your accumulated pension promise. It's your share of the fund value. If the fund is more underfunded now than last year your share is less.
In addition the trustees are more interested in looking after existing pensioners & active members than those who leave so someone like yorself who wants to "take the money and run" gets poorly treated.

Mary_Hartnell

I would expect you final salary scheme to have a workers' trustee. Ask him/her what they are playing at.
You have a right to read the trust deed. Ask for a copy.
(Warning: It might be the size of a small telephone book). Realistically you should have done this already if you are proposing to leave the scheme.

Retired_I.F.A.

An actuary working for the scheme values the retained benefits. In calculating the transfer value of them he has a fair amount of leeway as to the assumptions used and undoubtedly he is influenced by the employer in whose interest it is to offer you less. The assumptions have obviously been altered in the period between the calculations, The main one being the assumption as to future investment returns. A percentage or two p/a between now and you NRD in the scheme will depending on that length of time usually far outweigh any assumed gilt yield and mortality expectation assumed in retirement.

Interest rates are not actually included in the calculation, the nearest to them being the assumed rate available in the future on long dated gilts and then only a portion if any of the schemes investment as they don't invest in gilts much they are effectively always invested like you want to be in drawdown.

Presumably you had a TVA analysis done in September, in that it showed a percentage value known as the critical yield needed to be achieved p/a till you selected retirement date on the 80k TV in order to match the preserved benefits. You should ask you IFA to do another TVA now and see the difference. (I presume the assumptions in the calculation of annuities in the TVA ( gilts and mortality/annuity) to be altered very little if at all in that time.

Once you know the difference lets say it's a 1% pa increase get the IFA to see if he can discover the actuaries assumption changes and hopefully if they were say only 1/2% increase to future investment returns your IFA is then in a strong position to argue for a new calculation to be done that'll increase the TV. (Remember the TVA is your tool to check the actauaries assumptions)

Bottom line is final salary schemes basically can be doctored to screw the member and always will be until transfer values are independently calculated. Your IFA wont have a leg to stand on but he might be able to sweet talk them into getting you more. I was half the time when faced with clients in a simlar position.

Debt_Free_Chick

The biggest factor in the calculation of a transfer value is the bond yield.

As interest rates go up, the price of a bond goes down, so the bond yield increases.

Retired_I.F.A.

Debt_Free_Chick wrote: »

The biggest factor in the calculation of a transfer value is the bond yield.

Nope it's equities.


Admittedly I've been out of the business for nearly 7 years now and have not looked into transfer values in that time at all but having just goggled "transfer value calculations" I found this:

http://www.dwp.gov.uk/consultations/2007/approaches-to-pensions-calculations.pdf

It's 70 odd pages long and to be honest I could not be bothered to read everything just to argue with debtfreechick (especially as for some reason I clicked on the 2nd from top link goggle gave which was a earlier document and read all 30 odd pages of that one) however the earlier document basically proposed a change from discounting using equities to using bonds. the bigger paper got me thinking 'what the hell am I reading this for it's bloody work again sod that' but I carried on till I read 7B on page 21 which effectively backs up my previous post. Equities not bonds are still the major factor.

Of course the transfer value may have gone down by 10k because they discovered the fund was more underfunded than they thought which is another factor altogether.

Final salary schemes phtt the sooner they all go to the wall the better.

Debt_Free_Chick

Retired_I.F.A. wrote: »

Nope it's equities.


Admittedly I've been out of the business for nearly 7 years now and have not looked into transfer values in that time at all but having just goggled "transfer value calculations" I found this:

http://www.dwp.gov.uk/consultations/2007/approaches-to-pensions-calculations.pdf

It's 70 odd pages long and to be honest I could not be bothered to read everything just to argue with debtfreechick (especially as for some reason I clicked on the 2nd from top link goggle gave which was a earlier document and read all 30 odd pages of that one) however the earlier document basically proposed a change from discounting using equities to using bonds. the bigger paper got me thinking 'what the hell am I reading this for it's bloody work again sod that' but I carried on till I read 7B on page 21 which effectively backs up my previous post. Equities not bonds are still the major factor.

Of course the transfer value may have gone down by 10k because they discovered the fund was more underfunded than they thought which is another factor altogether.

Final salary schemes phtt the sooner they all go to the wall the better.

The equity returns that final salary schemes used are expressed as an investment premium, in addition to the bond yield.

Retired_I.F.A.

"The equity returns that final salary schemes used are expressed as an investment premium, in addition to the bond yield."

Thats gobblygook.. Its the discount rate, meaning the value of the pension at nrd discounted by x% p/a to a value today. Yes the investments may include gilts/bonds but it's a petty naff pension fund who invests in gilts for the long term or one that is massively over funded.

Debt_Free_Chick

Retired_I.F.A. wrote: »

"The equity returns that final salary schemes used are expressed as an investment premium, in addition to the bond yield."

Thats gobblygook.. Its the discount rate, meaning the value of the pension at nrd discounted by x% p/a to a value today. Yes the investments may include gilts/bonds but it's a petty naff pension fund who invests in gilts for the long term or one that is massively over funded.

Its the discount rate, meaning the value of the pension at nrd discounted by x% p/a to a value today

Agreed - but the discount rate is directly correlated with the bond yield. The argument goes like this ...... what return could we get from "an almost risk-free investment?". That would be the bond yield. Then "what extra return would we want, in order to justify the investment risk of investing in equities?" ..... Say 1% pa; or 2% pa .... the Trustees decide (in consultation with the company).

The discount rate then becomes the current bond yield + x%, with x being the equity risk premium decided by the Trustees.

The vast majority of pension schemes moved away from using a discount rate fixed directly to equity returns some years ago - as "current" equity returns were thought to be too unreliable.

FRS17 and IAS19 both use bond yields to determine the discount rate, too.

Have a look at a few actuarial valuation reports - or better still, the new Statement of Funding Principles - to see how the discount rate is fixed. Here's BA's Valuation from 2006. See page 23 ... (bold added)

"the discount rate used to calculate the capital value of future cash flows will be a prudent estimate of the future investment returns on the assets of the Scheme. This prudent estimate will be no more than 0.5% pa in excess of the yield available on gilts of appropriate type and duration, and any excess over gilt yields will depend upon a number of factors including the perceived strength of the covenant from BA taking into account the existence of contingent assets and other forms of security"

This paper from the Faculty/Institute is a little old, having been published in 2000, but it shows the results of a survey of pension schemes asking how they intended to value their liabilities going forwards. The vast majority intended to use the "bond yield plus equity premium" approach.

In my experience (30 years + as an in-house pensions manager), every scheme I've managed in the past 10 or so years uses this method - so do the schemes managed by my peer group.

You can Google for "Statement of Funding Principles" but the majority of results relate to Public Sector pension schemes. Few in the private sector have published their Statements on the web (so far). Members of DB schemes will have received at least two Summary Funding Statements since the new regulations came into effect in 2006, but most will not have sufficient detail to confirm how the discount rate is determined - so one would need to see the Statement of Funding Principles or the full Valuation report.

But .... to confirm. The discount rate used to value DB pension liabilities is likely to be directly correlated to the bond yield.

Retired_I.F.A.

Where is the difference between me saying the discount rate is based on the actuaries assumption of x% p/a for equities and you saying it's based on the assumption of the difference assumed between bonds and equities plus bonds? There is no difference, the answer is still the same.equity assumption just expressed differently.

Okay it's great for members of schemes such as BA where they stipulate its 0.5% plus the bond yield. That's giving those looking at transferring a defined discount rate and I'd say a bloody good one too everyone should transfer retained benefits from them.