As I have been around the country over the last few weeks, one important topic appears to be causing concern for many advisers – the potential changes to defined-benefit scheme transfer values. This has been a long drawn-out affair so it may be useful outlining where we currently stand.Last month, the Department for Work and Pensions issued a consultation on a new calculation method for transfer values from defined- benefit pension schemes. This is the latest step in a long-running saga where there is much debate but few conclusions being reached. The actuarial profession was originally asked to look at this in early 2005 and issued a draft guidance note on the calculation of defined benefit transfer values to its members on May 11, 2005. This draft guidance was called Exposure Draft 54 or EXD54. EXD54 is a radical departure from the existing guidance, Guidance Note 11 or GN11 for short. GN11 allows actuaries of defined-benefit schemes a lot of leeway in calculating transfer values and many use the assumed return on equities when calculating transfer values. In other words, the assumption is that the transfer value will achieve an equity return (say 8 per cent, but even this rate is not fixed – some actuaries assume more than 8 per cent, some less) between the date of transfer and retirement age. EXD54 assumed that the transfer value would only achieve a bond rate of return (say 5 per cent), based on the strength of the sponsoring employer. Crucially, by assuming a much lower future rate of return, the transfer value needs to be much higher, particularly the further the member is away from retirement. These higher transfer values could have a fundamental effect on defined-benefit schemes, many of which are already struggling to cope with the variety of financial pressures upon them. After consulting on EXD54 among its members, the actuarial profession could not reach a consensus and referred the matter back to the Government in late 2005. In particular, strong resistance came from scheme actuaries who feared that giving leavers higher transfer values would weaken defined-benefit schemes even further. In March, the then minister for pension reform, Stephen Timms, said that the DWP would shortly issue draft regulations. Instead, three months later, it issued yet another consultation, going over the same issues with the same people that the actuarial profession has already consulted. The least controversial, and most likely, outcome of this consultation is for a scheme-specific transfer value basis to be established. This would take into account the funding position of the scheme as well as the strength of the employer’s covenant. What would that mean in practice for transfer values? The transfer value calculated on any new basis will often be higher than the current value, and in some occasions dramatically higher, but the amount actually offered or paid may not rise as quickly. This is especially true if trustees believe that to pay the full transfer value on the new basis may reduce the security for those members remaining in the scheme. Looking beyond this, some individuals will gain more than others – transfer values in schemes run by a strong employer are likely to increase more substantially, as are those for younger members of schemes. The latest consultation closes on Friday, August11 and advisers may want to add their views into the mix with the actuarial profession. Changes are likely to take effect from April 2007 so this is an issue that advisers need to be aware of for clients considering transferring out of defined-benefit schemes in the near future.
Norwich Union is understood to be the only major insurance company which has failed to meet the FSA’s new product sales data requirements. From July 28, providers are required to provide information on whether products were sold on an advised or non-advised basis but NU will miss this deadline as its systems are unable to […]
Bright Grey has been accused by brokers of losing its focus and becoming too price-driven. The firm, which repriced its product offerings last week, says it wants to put IFAs at the core of its proposition. But Lifesearch head of protection strategy Kevin Carr says the firm has “lost its shine”, being too price-driven and […]
Nearly 40 per cent of consumers expect to get a payout for conditions that are not covered by their critical-illness policy. Research from Scottish Equitable Protect shows that only 60 per cent of consumers understand that providers would refuse to pay a CI claim for illnesses not covered under the policy terms. The research also […]
Reinsurers’ domination of the protection marketplace is detrimental to insurance companies and consumers, warns former Abbey chief Paul Bradshaw. He says the majority of protection business is supported by capital from a small number of reinsurers and he says this means that while consumers are subject to two lots of marketing from the provider and […]
Our client is a leading video game and publishing company best known for its console role-playing game franchises. The client provides a number of benefits, at varying levels and cost that attract a P11d liability. With the absence of a management log to track data for benefit movements, enormous administrative and therefore cost implications were occurring each year just to comply with P11d reporting requirements.
- Top trends
News and expert analysis straight to your inboxSign up
Latest from Money Marketing
The Financial Services Compensation Scheme will automatically compensate hundreds of clients of a collapsed discretionary fund manager, but other investors will have to wait another five months to get their money back. London-based Beaufort Securities has been investigated by both the FCA and US authorities. An indictment from the US Department of Justice alleges that […]
Fiducia managing director on ‘good old-fashioned’ customer service in the digital world Anthony Scott is adept in the art of communication. As an adviser and a novelist (he has written the novels ‘On Ashover Hill’ and ‘The Birthday Gift’) it is crucial for the Fiducia Group managing director to engage and build a rapport with […]
The FCA has reiterated its warnings that advisers outsourcing defined benefit transfer advice to firms with relevant qualifications cannot divorce themselves from responsibility for the eventual recommendation. While existing FCA rules require additional qualifications to advise on DB transfers, and the FCA has written to all firms who have DB transfer permissions as part of […]