Gary Tansley, consultant at HamishWilsonUnder the old rules the view was that the transfer valuation should be worked out on the basis of the cost to the employee of replacing the benefits elsewhere. Now they are saying that in future it will be the cost to the scheme of paying for the benefits.
In some circumstances this will mean that this will work out as cheaper for employers because they have the benefit of buying in bulk whereas the individual has to invest over the long term and then go and buy the best value individual annuity on the market.
Not only would the individual looking to replicate the benefits outside the scheme miss out on economies of scale by buying a single annuity, they would also have to pay to remove the longevity risk. Employers on the other hand can top up the scheme later if longevity proves to be an issue. They can also afford to be more adventurous in their investment strategy than the individual saving alone.
However, in some situations the new rules will make transfers more expensive because of the tightening of the investment assumption criteria.
Charles Cowling, managing director, Pension Capital StrategiesNew transfer value regulations have been long awaited. Their delay has been used by many trustees as an excuse not to review current transfer values. As a result many transfer values today are miserly. Some are as low as 25 per cent of the FRS17 value held in the company’s accounts.
Not surprisingly, this results in little transfer activity. Unfortunately, this means that companies are missing out on opportunities to generate significant shareholder value.
Trustees will now be encouraged by the new regulations to review transfer value calculations. Now is the time for companies to step in and ensure that a sensible approach to transfer values is implemented which will produce a significant reduction in pension liabilities and a “Win-Win” all round for trustees, members, companies and shareholders.
We have seen significant growth in solutions whereby members are given incentives (either in cash or enhancements to transfer values) to transfer out of their pension scheme. Done well, these solutions have produced significant reductions in pension liabilities – and happy pension scheme members. These new regulations give a window of opportunity which companies should grab before it is closed.
Glen Campbell, pensions and investment director, PIFC ConsultingThe regulations will not alter the overall buy-out costs on wind-up; it will not be cheaper or more expensive for employers to ‘offload’ their final salary pension liabilities.
We do anticipate, however, that schemes will review their transfer value assumptions, particularly paying close attention to assumed life expectancy levels. This could lead to increased transfer values for deferred members and leavers.
Clearly this could result in more individuals transferring their benefits. Since the transfer offered will, undoubtedly, be lower than the buy-out cost, this would have the effect of lowering future scheme liabilities.
Furthermore, the regulations will not impede the enhancing of transfer values with a view to encouraging this behaviour. We believe this will continue to be a growing trend in the defined benefits market.
The Pensions Regulator is due to publish guidance for scheme members to help them compare the key risks with any potential advantages associated with taking a transfer to another pension vehicle.
The approach adopted in this guidance could have a greater influence on the success of these exercises and, albeit indirectly, the impact of these regulations on employers’ liability costs.