How we value defined benefit pensions makes no sense to ordinary people. Normally you value something by the price that is placed on it. The prices of DB pensions have crashed since gilt yields started increasing in 2022, once the Truss catastrophe had crashed the price of long-dated gilts and stoked their yields, the transfer values

The impact on pension schemes whose assets were being depleted by their having to sell them to meet calls for debts they had incurred by geared LDI, was to make them report they were better funded and that the cost of paying pensions was falling. So just as the scheme’s assets fell and the scheme’s funding level improved, transfer values offered to members fell.

There were some perverse results from this. People who’d been ill advised to take transfer values found they were getting no compensation for the mis-sale because transfer values good now buy good annuities.  As people found the promised restitution disappearing, schemes found they could exchange what assets they had left for a bulk annuity which could lead to the scheme being bought out by an insurance company.

Yields have continued to increase, buy-outs are becoming easier for schemes to complete, transfer values have fallen through the floor and former steelworkers in Port Talbot and Scunthorpe are left without a penny of compensation.

Professional Pensions have been given a monthly view of the transfer market. Transfers have fallen by 20% in the last year and a great deal more than that since the start of 2022.

Meanwhile we hear that these DB schemes are collectively £160bn in surplus. What foolery is this?

With a chart to back them up, the analysts tell us that the scam flag is down to 83 suggesting that the scammers have worked out that selling people a transfer value so small to what people had got use to, was a mug’s game.

The chart below is quite relentless

Nonsense valuations drove people into the arms of IFAs who helped them scalp BTPS and many other occupational pension scheme of transfer values  way above the true value of the benefits being offered.  Schemes overpaid transfers to the great loss of those who stayed put. They now find them in surplus schemes even after the transfer debacles. But these surpluses have been created by enormous deficit payments demanded by trustees , egged on by TPR to make up the cost of silly transfers and then geared LDI.

None of this should have happened and it did because the funding process was tied to the ridiculous gilt yield, a number that was depressed onwards from the fiasco disaster of 2008-9 to keep Britain solvent (quantitative easing).

The FCA slammed the door shut on transfers at the point that they no longer became the easy win.  Transfer value methodology sometimes valued transfers when schemes were in deficit were over 40 times the annual pension. Today those transfers struggle to be worth half that while schemes are in surplus (on this crazy basis).

Government slammed the door on transfers when transfers became a bad deal. Contingent fees were banned when they would have stopped being charged.

Amazingly the tiny dribble of transfers recorded by XPS in April increased from the months before despite the value of the transfers decreasing. Transfers are down in value but up in take up as a percentage of inquiries. They are up on the higher values this time last year – why?

There should be a better way of valuing a benefit, one that makes sense to ordinary people. You get no more value from a £5000 pa pension whether it’s discounted at 2% or 6% but the discounting can mean its transfer value is three times a higher at 2% than at 6%. There is no way of explaining mark to market valuations of a pension scheme as the explanation of transfer values.

Come to think of it, what goes for ordinary people goes for trustees and ultimately the people who check the numbers, the actuaries for the trustees and the regulators for the PPF.

Nonsense to most of us!