“The pension transfer lottery” – thoughts from a PlayPen lunch.


At a consumer level, the absurdity of pension deficit volatility, seemed to me abstract and notional. But yesterday’s Pension Play Pen lunch changed that. 

One of our party reported that the value of his cash equivalent transfer value (CETV) changed by 13% in a month as a result of fractional changes in the discount rate used to calculate his entitlement.

Anyone taking a transfer needs to second guess the market. CETV quotations only last 3 months; those who applied in the “heady days” after 31st August, when gilt yields hit an all time low, are seeing their favourable transfers expiring fast. It is a race against time for them to get out.

A ready made marketing strategy for the IFA

The lunch threw up another interesting insight

Those funds that can actually afford to switch to a gilts based investment strategy are seemingly immune from the ravages of the political storms blowing around the eaves.

The total deficit of corporate U.K. pension funds fell 7.4% to £414 billion ($517.2 billion) for the month ended Nov. 30, but increased 56.2% over the year ended that date…..

Assets decreased 2% over the month, and increased 12.8% over the year ended Nov. 30. Liabilities fell 3.3% over the month, but grew 20.4% over the year.

And the forecast from Charles Cowling, man in charge at JLT, is not promising

“any current calm in markets may just be a temporary eye of the storm respite before the Brexit negotiations start in earnest.”

Throw in any other political events like French and German elections and the obvious answer is to throw in the towel and either pre-pack your DB scheme into the PPF or stuff it full of gilts (with the help of some expensive derivatives) to make it storm-proof.

But the scheme, if it moves to gilts and is properly funded on a best estimate basis must now offer transfer values based on the gilts rate. As we have seen in previous blogs, this means offering transfer values of more than 40 times the proposed pensions.

By comparison, one member of our lunch group who was in a scheme that was investing primarily in equities, was offered a transfer value (in September) of less than 30 times the promised income.

So not only is your transfer value subject to the vagaries of time but it’s subject to the ambition of the trustees to stay in or abandon a growth based investment strategy.

As one wag concluded,

“If I was an IFA, I would target my marketing at senior members of well funded DB pensions which have de-risked into gilts”.

Incidentally, the information on asset allocation of DB schemes is freely available from AP Phillips “Pension Funds and their Advisers”.


How do you know your scheme is well funded?

Well unless you are a trustee or a senior employee with access to the ongoing actuarial reports on the funding of your scheme, you have to guess as to whether your scheme is properly funded. If it is – on a best estimates rather than a buy-out basis, you get 100% of the buy-out cost as your CETV. If the scheme is not well funded on a best estimate basis, then you get a proportion of the full buy out cost with the deduction determined by the actuary.

To understand the difference between buy-out cost and “best estimate” we can again refer to the brilliant FABI graph (purple-buy-out and blue best-estimate)



The graph shows that best estimates of pension funds are a) considerably less volatile than buy-out estimates but b) considerably more optimistic. Remember that it is best estimates that are used to calculate CETVs – even if the best estimate is based on a buy-out strategy (where the fund would be 100% invested in “risk-free” gilts).

What this means is that a lot more people are getting 100% of their CETV entitlement than you might believe (if you believe the gloomy prognosis of JLT).

This also explains why those in the fortunate position of being in a scheme with 100% funding on a best estimates basis that has de-risked into gilts – may be getting 50% higher CETVs than those who are in a similarly well funded scheme investing in equities and even better off than the loser who is in an under-funded scheme invested in equities.

Mind you – the number of equity invested schemes that are in deficit must be reducing…

Assets decreased 2% over the month, and increased 12.8% over the year ended Nov. 30. Liabilities fell 3.3% over the month, but grew 20.4% over the year

It is these numerical non-sequitors that commentators like Anthony Hilton (and I) struggle with. The absurdities of the market are creating perverse incentives to leave well-funded self-sufficient schemes – at immense cost to the people who’ve paid to ensure you get full benefits!

The numbers just don’t make sense to me, the arbitrary differences between transfer values suggest that something is going wrong, for the “value” seems to be connected to meaningless measures.

When reported at an aggregate funding level for UK Pension Plc., deficit measures seem meaningless to the consumer. But when, (as I hope I have done in this blog), they illuminate the transfer lottery that people enter into, these absurdities seem very real indeed.

Is regulation wrong?

I am sure that the regulations as they stand are well intentioned, but they seem to have been scrambled by current economic conditions. They depend on rational markets and the Government intervention known as QE is not making for a rational market, it is forcing interest rates to absurdly low levels and forcing CETVs – for those discounting at these rates- to absurdly high levels.

If you are in a scheme that values itself against gilts you should be looking at a CETV, if you are in a scheme valuing itself against equity/gilts you should be in two minds, if you are in an equity based scheme you should leave your CETV alone.

I think this sums up the feeling of our lunch party and it is a conclusion that should have been forged in a mad-house. It suggests that the regulations are simply not working and that they are creating bizarre anomalies.

I will come on to other ways of doing regulation in a separate blog- I am off to Bristol now!

But I’d like to leave the argument pending comments from you.. as I am not a regulator, or a lawyer and not an actuary. As I have said in previous blogs, all this stuff is so dark as to need illumination. I was illuminated in the pension play pen lunch as were others in the room.

The insights we had were not lost on the participants which included the head of de-risking of one of our major consultancies. I think his title should be changed to the head of re-risking as all that de-risking seems to do is to move risk around the table- at enormous expense to the sponsor – and to the great advantage of those people well-informed enough to know when and where to take their CETVs.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to “The pension transfer lottery” – thoughts from a PlayPen lunch.

  1. I was really sorry not to make this lunch. Just to flag that this CETV issue is also highly relevant in divorce cases as it is used as the valuation for pension funds. I’d be surprised if many (or any) working in that realm, judges and lawyers alike, know this about the valuations they use every day.

    • henry tapper says:

      The tragic choices that many make when splitting pensions is to transfer out of perfectly good schemes which they think is part of a clean break! No matter how much you may want to have done with your ex- it’s no reason to have done with his/her pension scheme. Totally in agreement – the tragedy happened to one of my exes and I grieve for her.

  2. Yes I agree.

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