Why did schemes pay those crazy transfer values?

The advisers have left the house, some have seen their businesses grow as they responsibly advised clients on taking sky-high transfer values, some are struggling with insurers and the FIS to keep their business afloat – as claims arise.  Some advisory firms are no more – unable to meet claims

Hard earned permissions to transfer have been handed back. The days of clients being able to pay for advice from their newly created pots have passed.  Though theoretically – the attractions of taking a transfer remain the same, the lure of big pots is over; transfer values are only half of what they were

LCP told Professional Pensions that transfer values have dropped from around £250,000 at the beginning of 2022 (for a member aged 55 with a pension of £10,000 per year from 65) to around £130,000 now. This drop reflects a rise in gilt yields.

Here is the question; why did some transfer values top 40 times the projected annual pension?

The answer is simple, if gilt yields rise, the “present value” of liabilities falls. If the gilt yield doubles , the transfer value halves.

But the present value of the liabilities is an actuarial concept, used to measure surpluses and deficits at scheme level. The application of the concept to individual transfer values has given rise to the wild fluctuations in Transfer Values, mentioned by LCP above.

Someone who applies for CETV and is quoted £250,000 at the beginning of 2022, will be mystified if he/she gets a second quote 20 months later to find the number is £130,000.

And this blog is full of hard luck stories of people who feel they missed the boat. But the truth is that they have missed nothing. They have the same pension promise today as they had at the beginning of 2022. There may be a marginal improvement in the quality of the promise but that is of little matter, any scheme valuing on high multiples of salary had a very prudent valuation basis.

The hard luck story is not about the failure to get out, but the cost to schemes of meeting inflated Transfer Value payments.

Of all the pernicious impacts resulting from the tyranny of the gilts + discount rate, the inflation of transfer values at a time of quantitative easing seems the worst. The most egregious case – the £7bn that flew out the door at BSPS, followed a massive hike in transfer values as BSPS de-risked and lowered the discount rate early in 2017. The rush for the door was pretty well universal. In 2017 , £34.2 bn. was transferred out of corporate DB pension schemes , almost entirely into wealth management programs.

The acceleration of pension transfers from 2012 -2017 (see below) reflected more than just the decline in discount rates. Conditional Charging, Pension Freedoms and the increased sophistication of advisers post RDR all contributed. But the ONS numbers below show just what an impact CETVs made on the shape of ‘retirement wealth’.

So what is wrong with that?

The stock of wealth in our DB plans has been massively depleted. The most obvious loss was in 2022 when falls in bonds and equities, created losses compounded by the  fire-sale at the time of the LDI crisis. The less obvious loss was the process – described as “de-risking” which saw billions of assets lost to pension schemes through cash equivalent transfer values. Some of these transfers were further incentivized by employers desperate to get liabilities off their balance sheets.

All this money is now largely lost to productive investment, it sits in the wealth management sector and is not readily applicable to the productive financing of the UK economy. The de-risking of British pension schemes has meant that there is now insufficient investable capital in them, to warrant a growth strategy. Most DB schemes are now preparing for buy-out, having given up on paying their member pensions.

In my view , the failure of DB schemes to carry on and fulfill their function was in part, attributable to the sky-high transfer values calculated using rock-bottom discount rates. Neither the highs or lows were necessary, CETVs are a poor representation of the true value of the promise and if the actuarial profession comes to look at the causes of the demise of corporate DB pensions, they should write a chapter of the book on the ridiculous calculation of transfer values over the past 20 years.

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 Why did schemes pay those crazy transfer values?

  1. Derek Scott says:

    TPR guidance, which I suspect many trustees may not have read or at least been particularly familiar with, includes the following:

    “ In certain circumstances, trustees are permitted to offer transfer values which are less than the [initial cash equivalent] under the best estimate method. One of the permitted reductions is to allow for the funding situation of the scheme. However, trustees may only reduce ICEs for this reason after obtaining an assessment by the actuary of the funding of the scheme using the transfer value assumptions and known as an ‘insufficiency report’. Reductions to ICEs to take into account scheme funding must not exceed the maximum reduction identified in the insufficiency report.”

    I would love to hear more from scheme actuaries, present and past, about why this approach was seldom used in practice.

    I was one of a group of trustees who did use this at a small DB scheme for a professional organisation, after commissioning an insufficiency report from the scheme actuary, who worked for one of the industry’s life insurers, not one of the large actuarial consultancy firms.

  2. John Mather says:

    . What were you advising in a 40x transfer world?

    The timing of this article is significantly outdated, as it would have been more relevant around 6 years ago. In 2017/18, it was evident to any rational person that taking control of fund management was the right advice when considering the available TV options. This approach not only ensured greater benefits compared to pre PPF expectations, but it also provided superior benefits for dependents in the event of the member’s death.

    The question that needs to be asked is why more advisers chose to neglect the best interests of their clients.

    The mention of LDI in passing undermines the severity of the 30% loss experienced by all DB funds. The trustees have essentially lost 15 years’ worth of contributions. Therefore, it is unfair to solely associate misselling as a crime committed by IFAs.

    One example of a sacred cow is the belief in staying invested in the market. However, there are instances when a manager should exit equities, a decision that an individual can make but a fund cannot. This is why it is convenient to introduce a mythical rule.

    It is understandable that IFAs may give up in frustration. The compensation model, which leaves them in a difficult position regardless of their actions, destroys the business case for providing advice. The flexibility of the New Model Adviser (if it even exists) is similar to Brexit, as it can be interpreted differently by each individual, akin to an emperor receiving a new wardrobe.

  3. PensionsOldie says:

    This is just another example of the irresponsible application of a bond based mark to market valuation model. Pension scheme trustees thought they were protecting the Scheme and the other members by using best estimate assumptions in calculating transfer values which generated a larger fall in scheme liabilities measured under the technical provisions or on a solvency basis than the funds paid out. Hence the infrequent use of insufficiency reports.
    As John Mather points out the worst damage to future pensioners income was done by the bond based valuation models adopted to determine required employer (deficit) contributions and encouraging LDI adoption without considering the validity of the underlying assumption about the future implicit in the discount rate.

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