This letter explains why a former BSPS member claimed on BBC News last night that he had lost hundreds of thousands of pounds by timing his transfer request wrong; or- as he claimed – because he was badly advised over timing.
The letter ends
and gives two option boxes – one to stop and one to go. Those who stopped, like the person who got this letter – got the new values – which were generally higher, those who carried on regardless, were left with much lower transfers. This is the practical explanation for the grievance aired on BBC news.
Why did the basis change?
I mentioned that I am walking forward with a blindfold, I need help and I am getting it. I have received this explanation from an IFA who is happy to remain anonymous.
Regarding the sudden change in the British Steel transfer values this year – I have seen a letter from the trustee which states before June 2017 members who were more than 10 years away from retirement (under 55) had their transfer values calculated using a discount rate based 100% on Equity Dividend yields.
Members age 55 or over had their value based on a discount rate using Bond Yields. Then in June 2016 they used Bond yields for everyone which meant a big jump in transfer values because the bond yields are so much lower than Dividend yields. This particularly helped younger members (e.g. someone in their 40s could have seen an overnight increase of 170%).
This accords with the letter sent in by an IFA who has asked not to be named. The more conservative the investment strategy , the lower the discount rate and the higher the transfer values (all else being equal). The younger you were (under the old arrangements, the lower your discount rate and the lower your CETV). It is possible that some older people might have seen their CETVs gone down, but in moving to a flat discount rate for everyone, it looks like most people were winners.
This is because at the same time as going “flat rate” the scheme reflected the more conservative investment strategy which reduced discount rates all round and gave the scheme’s CETVs a big kicker!
Whether the scheme is “fully in bonds” – as mentioned above is another matter. The most reliable information I have at the moment is that the best estimate discount rate is calculated against the actual asset distribution within the BSPS fund , which is thought to be “rather less than before than rather greater than nothing”. This explains why CETVs are rather lower than would be expected if a pure gilt discount rate was in operation (the rate if the fund was totally in “risk-free” assets)
Transfer values were helped still further when later this summer BSPS received a cash injection of £550m sufficient to reduce its deficit and allow the trustees to reduce the clip on the assets that recognised this deficit from 8 to 5% (known technically as an insufficiency report). So it’s only been recently that CETVs have reached their highest rate.
What does this mean now?
CETVs are likely to fall soon as the basis for calculation moves from the old benefit basis (BSPS) to the new benefit basis (BSPS2). But BSPS2 may have a more conservative investment strategy which might offset the fall – so we just don’t know how much or quite when. The general view is that CETVs from BSPS will be higher than those of BSPS2 and any CETVs already issued or issued in Time to Choose, will be based on BSPS and be honoured at least to January 26th and possibly for three months after the date of issue.
To complete your transfer by 28 March 2018, BSPS estimates that you’d need to get your completed paperwork to them by 16 February 2018. This is to allow enough time for the Pensions Office to process your paperwork and pay your transfer to your chosen pension arrangement, by 28 March 2018.
If you miss this deadline, you might only be able to take a lower transfer value, or might not be able to transfer out at all.
• If you’re switching to the new scheme you won’t be able to carry on with transferring out of the current scheme. But you may still be able to transfer out of the new scheme at a later date. You’d need to start the process again by requesting a new transfer value quote from the new scheme. When you ask for your transfer value to be paid, you need to be at least 12 months younger than your normal retirement age. Your normal retirement age is usually your 65th birthday. Your transfer value in the new scheme is likely to be lower than your transfer value in the current scheme, to reflect the fact that the overall benefits, including possible future increases, could be lower in the new scheme.
• If you’re moving into the PPF you can still go ahead with a transfer, provided that your completed paperwork reached the Pensions Office by 28 March 2018. However, the transfer value you get might be reduced. This is because the transfer value payable in these circumstances cannot be more than the cost of providing the compensation payable to you by the PPF. This might be lower than the transfer quote from the current scheme. If you don’t want to go ahead with that transfer, you won’t have any further opportunity to transfer out. If you didn’t return your transfer paperwork by 29 March 2018, then you won’t be able to transfer out at all.
The obvious guidance is that if you are going to transfer, get on with it and get your papers in by 16th Feb, if you aren’t – make sure you’ve completed your option form and put your feet up – it’s nearly Christmas!
And finally “The Chair of the Trustees speaks”
In a rare utterance on member choices, BSPS trustee chairman Allan Johnston has said:
‘We are concerned by reports that some members have been targeted with inappropriate financial advice and feel pressured into making a decision on transferring their BSPS benefits.
‘While the trustee cannot advise people what to do with their pension we would urge eligible members to think carefully before transferring their scheme benefits out of the BSPS to another pension arrangement as they would be giving up guaranteed future pension income in return for income that might not be guaranteed and could vary depending on how it is managed.’