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Warning on new transfer value basis

Proposed changes to the calculation of pension transfer values could benefit departing employees while reducing the benefits payable to remaining members, says First Actuarial.

The actuarial boutique is concerned that proposals from the Institute of Actuaries will also introduce new levels of complexity that will impact negatively on occupational schemes.

The Institute of Actuaries is proposing moving away from basing transfer values on the cost to the scheme of providing those benefits to members to a mark to market approach, which uses different financial instruments to calculate the value of the benefits.

This means the lower discount for default risk on transfers out of well-funded schemes, and increased cost of the calculations, could eat into scheme reserves by paying out higher transfer values.

First Actuarial director Alan Smith says if the costs of the requirement for trustees to calculate the risk of default by the employer are not taken into account and any surplus assets in the scheme are included in the calculation, those transferring out may get a better deal at the expense of those left behind.

Smith says: “If a scheme is fully funded on a prudent basis. it is unreasonable that the margins held for prudence are passed onto a member who chooses to take his or her benefits elsewhere.”

Chairwoman of the Institute of Actuaries pensions board Wendy Beaver says: “We believe this solution is the fairest to all early leavers who transfer.”

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