Transfer heaven or transfer hell?
Henry Tapper discusses the highs and lows of DB transfers.
Saturday Kitchen's binary dilemma - food heaven or food hell - informs on the "stampede" for a defined benefit transfer value (CETV).
Those who still have this option have been offered as much as 40 times the prospective pension as cash payable to an approved pension. With critical yields (needed to secure certification) at all-time lows, pension freedom beckons.
But transfer heaven can turn to transfer hell as transferors negotiate with advisers for the certificate to unlock the gates.
There is a "transfer now while quotes last stampede" on at the moment. The FT's word "stampede" sounds sensational but administrators report it as accurate.
IFAs are reporting up to four month queues to use transfer value analysis systems. With most CETV quotes expiring within three months, many transferors have to pay for a new quote only to find CETVs have fallen by as much as 15% from September highs.
The volatility of CETVs is a product of the discount rates by which they are calculated. If the discount rate is set with reference to gilts then the economic thunderclaps of Brexit, quantitative easing and Trump-enomics are buffeting transfer values from heaven to hell.
But not all discount rates are gilt related - The Pensions Regulator calls on actuaries to use a best estimate formulation based on the scheme's disposition of assets. Schemes that have growth assets have higher discount rates and lower transfer values.
CETVs from these schemes are less sensitive to seismic shifts in gilt yields, CETV from such schemes are neither in heaven or hell but in a penumbrous purgatory!
Real world impact
But let me not stray into further arguments about the heaven or hell of gilts plus valuations! Let's think about the 'real world' impact of CETV volatility - volatility driven by what seem arbitrary changes in the gilt yield curve.
Imagine your divorce settlement is finalised this year and you exchange an earmarked pension of £10,000 for property assets of £400,000. You get to keep your family house and your ex-wife gets a £10k DB pension.
Next year your house is worth £450,000 and the DB CETV has fallen from heaven to hell and is now valued at £300,000. Has anyone been proven to have mis-sold a CETV to a spouse (yet)?
And what about that CETV analysis that was done in September on a quote of £400k and became worthless in December? What of the heavenly prospect dashed by a hellish change in gilt yields?
The IFA fee remains payable but the computer that once said "yes" now says "no". The CETV has fallen, the critical yield has risen, cue the class action lawyer.
Those who can afford to read the FT will have read Ros Altmann crowing that she had "cashed in" not one but two DB pensions in the autumn - presumably she"s in 'pension heaven'. It seems contradictory that someone who has advocated prudent saving for a pension and damned the feckless LISA should be promoting the management of retirement income from within a SIPP (or even from a bank account!)
That SIPP statement showing a £400k balance might sound heavenly, but many have encountered the perils of pension scams, pounds cost ravaging and fund-platform-advisory costs. Add to operational perils the unexpected liabilities of living too long and geriatric care and the tableau of pension heaven is reversed for one of later-life financial destitution.
There is a 'transfer-now-while-quotes-last stampede' on at the moment. The FT's word "stampede" sounds sensational but administrators report it as accurate. Almost as worrying as the stampede for quotes is their low take-up rate.
At a time when transferors are dreaming of pension heaven, the fear is that pensions hell is gaping. As St Peter, (in IFA garb), fiddles with his keys, the celestial apparition disappears behind the clouds.
Henry Tapper is a director at First Actuarial
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