Thought / 13 Mar 2018

Transfer Values - Cash Option?

By John Herbert

Transfer values are at a historically high level – often equivalent to 30 or 35 times the current pension amount. The reasons are well documented – ultra low interest rates, improved life expectancy and many schemes now having lower risk investment strategies. The one thing that does seem hard to understand is that transfer values make no allowance for members taking cash at retirement.

This stems directly from the legislation which says that it should be the “best estimate” of the cost of providing the benefits. However, no allowance is made for options that reduce the transfer amount (which the cash option normally does). In practice, the majority of members take the cash option at retirement so allowing for this in the transfer calculation would seem to be reasonable. It’s just not allowed!

Most funding plans make some allowances for members taking cash at retirement, which helps to reduce the cash needed for funding in the short term. This means that, in some cases, the transfer value can be higher than the technical provisions close to retirement. Normally the differences are relatively small and this is unlikely to be a major problem. However, with more plans offering the option of a transfer value at retirement, this issue may become more significant.

In particular, trustees should consider the implications if a more extensive bulk exercise is undertaken for all members over the age of 55.  “Flexible Retirement Options” should be offered such as transfer value or taking the benefits early. This could mean a number of people take a ‘transfer value’ within a short time frame which may increase the deficit at the next valuation and hence increase the cash contribution needed by the sponsor.

John Herbert

Chief Actuary

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