BeeHive > BeeLines > 2008 > Apr > All Change on Pension Transfer Values
All Change on Pension Transfer Values
Uh Oh! The Department for Work and Pensions has just published its response to the consultation on the draft regulations concerning the future approach to the calculation of pension transfer values. If you know what I’m on about you can get a downloadable pdf file of the DWP response just by clicking that link there if you like. If not, read on…
People who are members or ex-members of final salary occupational pension schemes have their deferred pay caught up in such schemes. There’s a lot of money tied up in funded private sector schemes of this type; over a trillion pounds in fact. The things that this trillion pounds or so of deferred pay are kept in are called pension funds and Joe and Josephine Average can get to read about them any time they like in the Sunday papers. There are always stories about pension funds in the press. They usually involve big numbers and quotes from experts about things that bamboozle ordinary people. The money in pension funds belongs to ordinary people; it’s their deferred pay and it’s there to provide them with an income when they’re getting on a bit. That income’s called a pension.
When someone has stopped being a contributory member of a final salary occupational pension scheme, maybe because they’ve changed jobs or maybe because their employer went off the whole idea of running the scheme and closed it, they end up with something called a deferred pension. A deferred pension is a pension that hasn’t started paying out yet, but will do at some point in the future. That point is called retirement.
People who have deferred pension rights in the big pile of money called a pension fund can rest assured that it will be looked after for them until they need it by the people who are responsible for running the fund. These people know what’s what big pile of money-wise and they understand all the fiddly stuff.
Not everyone with a deferred pension is happy to leave it in a pension fund under the care of others though. Sometimes some people ask the people who are looking after their money in the pension fund if they can have it to look after themselves. Some people are like that; they prefer to keep their eye on things. The legislation allows people to do that by putting their pension money in an individual pension scheme if they don’t want to leave it in the big pile of money in the collective pension scheme. But, once someone asks for their little bit of money from a pension fund all sorts of bells start ringing. For a start someone who knows what they’re doing needs to calculate how much cash the fund should pay over in respect of the pension benefits that the person could expect to get from the big fund when they reach retirement age. That’s a fairly fiddly calculation that has to take account of the funding position of the scheme (some don’t have enough money in them and are referred to as being underfunded) and the way that the big pile of money is invested, with the overall idea being that the person leaving doesn’t get more or less than their fair share of said big pile of money.
Once the calculation’s done the amount of money offered to switch over to another pension arrangement is called a transfer value. Transfer values and how they should be calculated by the people who understand that sort of stuff are what this consultation by the DWP has all been about. Basically the government guys have been asking everyone who’s interested to put in their tuppence-worth on how pension transfer values should be arrived at. The consultation started on 6th July 2007 and ended on 17th August 2007. As a result of that the Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008 (SI 2008/1050) were laid on 11th April 2008. The plan is that these new regulations will come into effect on 1st October 2008.
One of the big questions was whether or not there should be a standard basis for valuing pension assets that people have left in occupational pension schemes; so everyone would know that a pound of pension left behind in one scheme would have the same value as a pound of pension left behind in another similar scheme. But that’s not the way it’s panned out. What it looks like we’re going to get are things that are referred to as scheme-specific transfers. In essence that means that every scheme will be able to say what a pension pound is worth in their scheme taking account of current conditions and the way that the scheme’s assets are invested and the returns that can be expected etc. etc.
Mind you, the problem with having a standard basis would be that it would be a bit like the outdated Minimum Funding Requirement (MFR)(ie out of date, too low and, in particular, not reflecting the fact that Joe and Josephine Average are living longer and longer); government set bases are not that good at putting a proper value on pensions. At least with the scheme specific basis an actuary is trying to guide the Trustees as to what increased longevity will mean.
Fiddly, I’d say. And something that financial advisers who are asked to help people sort out what’s what with their deferred pension rights will need to clue up on.
15 April 2008
Source:
DWP – Response to the consultation on draft regulations, published April 2008.
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