Cash Equivalent Transfer Values

Transcription

1 Tideway Cash Equivalent Transfer Values Relative Value Guidance for DB Scheme Trustees and Members March 2015

2 Introduction Tideway has extensive experience in advising individuals with deferred benefits across a wide range of final salary pension schemes (DB Schemes). The new pension freedom rules coming in to force in April 2015 create a much bigger divide between the shapes of benefits available from a DB scheme and those which can be derived from an invested Personal Pension account. These changes make the transfer option a suitable and attractive transaction for a wider population of deferred members. Members attracted to the transfer option will most likely not go on to buy annuities with their transferred funds but will use drawdown and an invested fund as an alternative route to generating income and accessing capital in retirement. The following tables give an indication of the size transfer values Tideway would view as providing reasonable relative value to a member considering a transfer out of a DB scheme to utilize drawdown. Calculations are based on a Target Return methodology as opposed to a traditional Critical Yield Analysis referencing the forecast cost of annuity at normal retirement date. This target return approach is a more appropriate guide to relative value for those who will use drawdown given that transfer values will always likely be lower than the open market costs of an annuity. This is especially true as members get close to normal retirement age when the annuity/transfer value gap will translate to unrealistically high critical yields based on the old methodology. The basis of these target return based calculations is that a transfer value at this level should allow a scheme member to reasonably match the defined benefits they will leave behind using drawdown, a cautiously managed investment portfolio and allowing for the costs of initial and ongoing advice, drawdown administration and investment management. 1 Tideway TRACC

3 It should be noted that relative value is only one input in to the decision to take a transfer option. Individual members will also need to consider: Their need for annuity style secure lifetime income as provided by the DB scheme The relative merits of defined benefits versus alternative benefit shapes Their ability to cope with the extra responsibilities implicit in owning an actively invested drawdown account 2 Tideway TRACC

4 Transfer Values The following tables show Tideway s reasonable value transfer sums as a multiple of the currently accrued defined pension benefit payable at the members Normal Retirement Dates (NRD). Benefits with limited price increases LPI Assumption 2% Age Age 65 NRD Age 60 NRD x x x x x 3 Tideway TRACC

5 Benefits without increases Flat Rate Benefits Age Age 65 NRD Age 60 NRD x x x x x 4 Tideway TRACC

6 Calculation Assumptions Longevity The calculations take both a unisex and conservative approach to longevity and look at matching benefits to age 90 for all members and without reference to a spouse s pension. At first glance this may appear to be a gross simplification of the cash flow stream that may emanate from a defined benefit. However, average mortality is of little consequence to a single member, or couple contemplating their retirement. In our experience planning for income to age 90 is a conservative approach which accepts that lifestyle beyond age 90, if it transpires, will likely be significantly different to pre age 90. Benefit Escalation The calculations are based on either no escalation of benefits or LPI increases of 2% p.a. (Bank of England target rate) in deferment or payment. The calculations can be refined on a scheme by scheme basis to reflect fixed escalation rates where applicable. Target Return The benefit matching target return is based on an average of 2.25% p.a. net of the costs of advice, pension s admin and investment management (1.75% p.a.), equivalent to a gross return assumption of 4% p.a. gross return. There is an initial 3% cost assumption for advice, scheme set up and investment charges. Putting a 4% gross return in context A 4% gross return target would allow for a 100% fixed income drawdown portfolio investing in Corporate Bonds, without any equity exposure. According to Bloomberg (03/03/2015) there are 50 UK, US and European companies issuing 50bn of publicly listed, sterling denominated, investment grade bonds yielding more than 4% p.a. to maturity dates between 5 and 35 years. 5 Tideway TRACC