New Transfer Value Regulations
The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.
With effect from 4 August 2003 new transfer value regulations came into force (The Occupational Pension Schemes (Transfer Values and Miscellaneous Amendments) Regulations 2003). These regulations only apply to final salary (defined benefit) schemes and include values produced for pensions and divorce cases.
Under the new rules when the scheme actuary calculates the CETV they can take into account:
- the minimum funding requirement (MFR) funding position of the scheme, and
- a new actuarial report called a GN11 report. This report shows the state of a scheme's funding in relation to its chosen CETV calculation basis. If this report shows that the scheme is not fully funded, then the actuary can decide to reduce the CETV for the member. This reduction does not have to be in line with the percentage shortfall indicated at the time of the last MFR valuation. Instead, actuaries will be permitted to reduce the CETV by up to the maximum of the percentage deficit, taking into account their knowledge of the scheme.
The actuary cannot reduce the CETV by more than any deficit shown in the last MFR valuation. If the GN11 report shows that the scheme funding is now less than the last MFR valuation, then the scheme actuary will need to carry out a new MFR valuation before he can reduce the CETV further.
Under the previous rules a member could receive a much larger share of the fund than they were really entitled to, this should no longer happen.
What happened before 4 August 2003?
Members who chose to transfer salary-related benefits out of the scheme had a right to a CETV. This CETV had to reflect the expected cost of providing their accrued benefits within the scheme. The old rules permitted some reduction to the CETV, where the most recent actuarial valuation showed a shortfall in funding on the MFR basis. However, many trustees felt that the legislation did not permit a reduction that, in their view, would be appropriate to protect members who leave their benefits in the scheme. They believed that, in some circumstances, payment of a transfer value calculated in accordance with current legislation could prejudice the interests of remaining members.
What happens now?
New rules regarding the calculation of the CETV were laid before Parliament on 14 July 2003 and came into force on 4 August 2003. These new regulations (The Occupational Pension Schemes (Transfer Values and Miscellaneous Amendments) Regulations 2003 (S.I. 2003/1727)) amended the regulations. The new regulations allow trustees to take into account the current funding level of their scheme when quoting CETVs, subject, as previously, to the MFR based underpin.
Where a scheme is not sufficiently funded to meet the full amount of the CETV in respect of all of its members, as determined by the actuary, the new rules enable the trustees to reduce the amount of the CETV. The amount of the reduction must be no greater than the amount by which the actuary's report shows the scheme assets as being insufficient to pay the minimum amount of the CETV in respect of all scheme members. The actuarial profession has issued guidance to actuaries responsible for reporting to trustees on the reduction of CETVs and advising on funding matters, in a revised version of its guidance note, GN11. The amended legislation and GN11 provide for a new actuarial report (a GN11 report) on the state of a scheme’s funding in relation to its chosen CETV calculation basis. Only when trustees have obtained such a report from their scheme actuary, are they permitted to reduce CETVs from their full value.
In February 2003 Opra said that, in the period leading up to the introduction of these new regulations, it was willing to relax their normal reporting requirements for CETVs. In certain circumstances, and on a strictly temporary basis while the DWP were consulting on the new regulations, Opra would not sanction trustees who declined to offer CETVs where to do so would prejudice the interests of remaining members. Now that the new Regulations have taken effect Opra have withdrawn this relaxation. Opra say that where, for reasons beyond their control, trustees are unable to get the information they need to prepare the CETV within three months, a 'long stop' of up to six months can apply. If a GN11 report needs to be done Opra will not usually question a decision taken by the trustees to rely on this 'long stop', provided they do their best to issue the figures as quickly as they can.
What is MFR?
MFR or minimum funding requirement was introduced as part of the Pensions Act 1995, which came into force on the 6 April 1997. It was introduced to ensure that there was a minimum standard of funding in a final salary (defined benefit) scheme i.e. the assets must be greater than or equal to the liabilities under the scheme. The aim is that at all times the scheme should be 100% funded. If this is not the case then the employer must make payments to restore the funding to 100% within a certain timescale. The scheme should always have enough assets if it was to wind up to:
a) be able to pay current pensioners their annuities, and
b) pay live and paid up member's transfer values by which they could secure their benefits earned to date with an insurer or in another pension scheme.
Since 6 April 1997 trustees or managers of final salary schemes must obtain regular actuarial valuations that will usually be combined with the normal triennial valuation. Within 12 weeks of doing the valuation they must prepare a schedule showing the rates and due dates of all contributions (except AVCs) payable for the next five years. The actuary must certify that the rates in the schedule are adequate, either to maintain or to achieve the MFR over the five-year period. This schedule enables the trustees to ensure that contributions are paid promptly and at the agreed rate. Any non-payment can easily be spotted and rectified.
What is a CETV or cash equivalent transfer value?
When a member of a final salary scheme leaves the scheme after at least 2 years service they will have accrued a pension benefit which will be payable at normal retirement date.
The member is entitled to take a cash equivalent of their future entitlement in the form of a transfer value. The transfer value should represent the actuarial valuation of the preserved benefits.
A link to the new transfer value regulations is below:
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
We cannot accept direct transfer business from members of the public. Transfers are complex and individuals should consult an Independent Financial Adviser for advice. Transfers depend on personal circumstances and may not always be in an individual's best interest. Production of a transfer value analysis is a necessary requirement of the transfer process.
Updated November 2003
Published 07 August 2003
For professional advisers only