The latest consultation on the best way to calculate pension transfer values has been issued by the Government.
In March, the then Minister for Pensions Reform, Stephen Timms, stated the Department for Work and Pensions (DWP) would ‘shortly’ be issuing draft regulations to legislate how to calculate defined benefit (DB) ‘cash equivalent transfer values’.
However three months on, the DWP has instead issued a six week consultation paper to “prompt consideration and discussion”, as the government “has not formed any firm views” and wants to “gather together opinions and views from all sections of the pensions community”.
The 36 page consultation, which ends on 11 August, says comments are not restricted just to the approaches outlined by the government, adding “information on any other possible approaches would be very useful.”
Normally responsibility for establishing the framework under which pension transfer values are calculated, falls to the Actuarial Profession, however it asked the government to step in after an inconclusive consultation on its proposed draft guidance note.
In May last year when the profession reviewed this issue, it suggested replacing the current Guidance Note 11 (GN11), which is periodically updated, with a new draft guidance note called Exposure Draft 54 (EXD54).
But following the consultation period, the Actuarial Profession couldn’t decide what was the best way forward, as the proposed EXD54 caused a lot of concern among both actuaries and the wider pension industry for wanting to assume the transfer value would achieve a lower rate of return.
Currently GN11 allows scheme actuaries some leeway in the way they calculate the transfers, by allowing them to assume the transfer will achieve an equity rate of return between the date of the transfer and retirement age.
However EXD54 proposed the transfer value would only achieve a bond rate of return. As this is assuming a lower rate than an equity return, the transfer values would need to be higher to compensate, particularly the further away from retirement a member is.
And this could lead to a weakening of DB schemes, as the higher values could encourage more people to switch to defined contribution (DC) schemes, leaving employers to foot the bill, with the possibility some would decide it would be easier to close the scheme than increase contributions.
As a result of the differing views towards EXD54, the Actuarial Profession asked the government to step in, and the latest consultation from the DWP outlines three possible methods for going forward:
- Prescribed Assumptions
- Scheme Specific Basis
- EXD54 Basis
Each of the methods are discussed in detail, such as how it relates to specific objectives of being broadly neutral, broadly fair to the member, and how it relates to the scheme specific funding requirements.
But each has its disadvantages with the consultation stating they are “not all necessarily feasible” but they represent “different theoretical options” and “illustrate many of the key issues”, which need to be covered if the government is to meet its aim of having regulations in force by April 2007.
In addition the consultation also questions the best way to get information to the members about pension transfer values, while also reducing the regulatory burden on schemes, as current rules allowing members annual transfer valuations have been described as being “administratively onerous and expensive”.
One solution put forward by the government is to increase the amount of information disclosed in the annual valuations, but offset the extra administration and expense by limiting members to one valuation statement every three years.
Another possible solution to make members prove they have sought independent financial advice before trustees or managers allow them a transfer, is considered by the consultation to possibly be “too heavy handed”.
John Lawson, head of pensions policy at Standard Life, says the DWP can’t seem to make up its mind on this one, as going out to seek the opinion of those who have already given it, is likely to result in the same stalemate the actuarial profession has already encountered.
He adds: “Someone needs to take the bull by the horns and decide on the right balance between making sure people get fair transfer values when they leave and protecting the solvency of DB schemes.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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