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Adviser  >  Technical Central  >  OPS Matters  >  Transfer values - new draft regulations

Transfer values - new draft regulations

Earlier in the year, we reported on the DWPs proposals for a new transfer value basis.

Following several months of consultation and the issue of the response to that consultation by the DWP, we now have yet another consultation paper which includes a draft of the regulations and details of how these compare to the GN11 transfer value basis.

The new regulations change the calculation of transfer values to make them more ‘scheme specific’ so that they reflect more accurately the cost to the scheme of providing the pension to the member.

There will be a substantial impact on trustees who will be required to be more involved in the process of calculating transfer values.

A short summary

  • It’s expected the new regulations will take effect from 6 April 2008

  • CETVs (cash equivalent transfer values) will be dealt with on a scheme specific basis and trustees will become responsible for calculating them

  • The regulations are intended to define a minimum level for CETVs, however trustees will have to consult with their Scheme Actuary and decide how the component parts of the CETV are to be calculated

  • The assumptions used in working out the transfer values must be based on a "best estimate" cost to the scheme of providing an alternative deferred benefit. Trustees don’t have to disclose these assumptions, however it has been suggested that it would be ‘good practice’ for schemes to provide this information on request

  • Trustees will be required to use a discount rate in the calculation of the CETVs that relates to a ‘best estimate’ of future returns taking into account the scheme’s existing asset mix.
  • A ‘reasonable’ administration cost incurred by the scheme in relation to the transfer can be deducted from the CETV
  • Under the new regulations the timescale for providing CETVs to members can be extended from 3 months to 6 months. This extension is designed to give trustees more time where there are ‘reasons beyond their control’ which mean that they may not be able to obtain the necessary information to do the calculation
  • Greater disclosure to members considering transferring out of the scheme will be required. Trustees will have to inform members of additional information when quoting CETVs
  • The existing GN11 is expected to be scrapped going forward.

What about underfunded schemes?

The new regulations allow transfer values to be reduced to reflect underfunding in a scheme. However, in order to do this, trustees must have an ‘insufficiency report’ in place. It’s expected that this report will be produced at the same time as the actuarial valuation.

The insufficiency report is broadly the same as the current GN11, with certain exceptions. For example:

  • Market value – GN11 states the assets have to be valued on the market basis or a higher amount as the actuary determines, the insufficiency report requires the use of market value only

  • Winding-up expenses – an allowance may be made for winding-up expenses.

As part of the transitional arrangements and to minimise the cost to schemes, existing GN11 reports at 6 April 2008 can still to be used until the new insufficiency reports are prepared.

What does this mean for trustees?

The responsibility for calculating transfer values will be with the trustees, in conjunction with the scheme actuary. So trustees will need to be more pro-active in their discussions with the scheme actuary. And because some assumptions using the new basis will depend on the scheme’s asset mix, trustees may wish to review their investments to make sure that they provide a fair result, both to the member transferring and the remaining scheme members.

What’s next?

This latest consultation closes on 17 August 2007 and the regulations should be in force next year. Trustees should be getting themselves up to speed on what will be expected of them before the proposed April 2008 start date.

                                                                                                         

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