Huge Drop in Defined Benefit Transfer Value

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AChara

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I have about a year to go to my 65th birthday and taking benefits from my DB pension.

I have been getting annual valuations and from last year to this year the TV has dropped a massive 17% (down from €541,930 to €450,418).

Previous to that the TV had been going up very nicely from year to year. And while I have a basic understanding of why the TV has dropped, I was still shocked to see over €100,000 chopped off the figure.

I had been thinking that a TV just before retirement date was going to be best for me but given the dramatic fall in value, it is now looking like I’d be better off sticking with the deferred pension (€24,230).

That is unless something dramatically positive happens in the next short few months.

Anybody have any views on what is likely to happen by April next year? Any possibility the TV might revert to something like last year’s value? Or is it more likely that there will be a further drop in value?

In any event, anybody with a DB pension, be forewarned that your TV is most likely drastically reduced from a previous valuation.
 
I feel your pain. I too had been been monitoring TV and last June (2022) found TV reduced by about 13 % from previous year.
 
The reason for the drop in the TV is the rise in interest rates and the subsequent increase in Annuity Rates. If now costs less to buy your Annuity (€24,230) that it did last year, so the drop in the TV.
As to the future, well my crystal ball says that interest rates are likely to remain at current levels for some time. And my crystal ball is never wrong (well almost never ).
 
Conan said:
The reason for the drop in the TV is the rise in interest rates and the subsequent increase in Annuity Rates.
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The pensions guru in my job (the union rep) says this isn't quite right. He said that it's all to do with the increase in interest rates. This is the reason transfer values are now less than before and the reason annuities cost less as well. The main point he was making is that there is a formula for working out the transfer value which is independent of the cost to buying an annuity.

What he was trying to explain to us is that
Transfer values are less coz interest rates are higher
Annuity cost less less coz interest rates are higher
and not
Transfer value are less coz annuity costs are less

hope this makes sense.
 
Conan said:
The reason for the drop in the TV is the rise in interest rates and the subsequent increase in Annuity Rates.
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Robzig said:
The pensions guru in my job (the union rep) says this isn't quite right. He said that it's all to do with the increase in interest rates. This is the reason transfer values are now less than before and the reason annuities cost less as well.
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So how is that any different to what @Conan just said? :confused:
 
Thanks Early Riser - I worry sometimes that my posts aren't so clear - reassuring that you understand the point.
 
ClubMan said:
I still don't understand how your point was different to what @Conan said. Maybe you can/should clarify?
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My reading of Conan's post is that the rise in interest rates led to a rise in annuity rates which led to a fall in TVs. (A caused B which caused C).

According to Robzig's post the rise in interest rates led to both the fall in TVs and the rise annuity rates. (A caused both B and A caused C).

I am not doing arbitration but there is a difference between these.
 
Maybe it would be good if an actuary explains the way TVs are calculated to clear up the confusion that seems to be present. I'm sure I read that @Colm Fagan is an actuary and he might be able to explain why TVs are not directly linked to annuity rates which Conan seems to be saying here

Conan said:
The reason for the drop in the TV is the rise in interest rates and the subsequent increase in Annuity Rates. If now costs less to buy your Annuity (€24,230) that it did last year, so the drop in the TV.
Click to expand...
 
RedOnion said:
The OP is only 1 year from retirement. The difference is purely academic.
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This is not what was explained to me. Are you saying that you believe that the TV is more or less equal to the annuity cost the day before retirement? I really think we need an actuary to explain how the calculation is done.
 
Robzig said:
This is not what was explained to me. Are you saying that you believe that the TV is more or less equal to the annuity cost the day before retirement? I really think we need an actuary to explain how the calculation is done.
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Unless the pension scheme is underfunded, or an enhanced TV is offered, the change in TV of someone less than 1 year from NRA can be almost 100% attributed to changes in annuity rates.

There are 2 steps to calculate a TV (without an enhanced value):
1. What's the capital value of the DB at NRA? Implied annuity rates are the most transparent way of calculating that.
2. What's the net present value of that? discounting using interest rates is the most transparent way of calculating that.

The further away you are from retirement, the more impact that interest rates have. But the calculation of the capital value is driven by annuity rates, so also massively influenced by interest rates.

For someone less than 1 year from NRA, the annuity rate is really all that impacts the calculation of the TV.
 
AChara said:
Anybody have any views on what is likely to happen by April next year? Any possibility the TV might revert to something like last year’s value? Or is it more likely that there will be a further drop in value?
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Historically, current interest rates are, I think, still low. What we saw in the last dozen years was truly unprecedented with interest rates on some occasions being even negative :eek: This happened because of massive ECB intervention in the markets post the Great Financial Crisis.
It is very difficult to see those conditions being repeated anytime soon.

Your TV conversion rate is equivalent to an annuity rate of 5.4%*. That does not look good to me from an actuarial point of view but there are some considerations:
1) Most important is the level of inflation proofing. If the pension is fully inflation proofed then the 5.4% is very bad value. Irish Life annuity calculator gives a rate of 3.6% with inflation capped at 5%. If it is zero inflation proofed - it is a bit closer to fair; Irish Life rate 5.1%.
2) Does your pension include a dependent's pension? If so then again 5.4% looks like poor value; Irish Life zero inflation 50% spouse reversion is 4.7%.
3) Your state of health. These sort of calculations assume you are in average health for your age. Obviously there are circumstances where 5.4% would be good value, but then again maybe the trustees would adjust the TV.

Have you been offered "free" financial advice on this? I am seeing quite a lot of people facing your dilemma.

* 5.4% = 24,230/450,218. If the market annuity rate is lower than this then the TV is "bad" value and vice versa.
 
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Robzig said:
Maybe it would be good if an actuary explains the way TVs are calculated to clear up the confusion that seems to be present.
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There is a statutory minimum basis for calculating TVs. However, TVs may well be higher than this if for example credit is given for discretionary increases.
The statutory basis allows for adjustments to the minimum TV to allow for changes in interest rates. The adjustment factor is the Market Value Adjustment or MVA so that TV = Basic value x MVA. It is based on the 10 year French bond yield and for non inflationary benefits it is as follows:
1683467387498.png

The 10 year French bond yield has moved over the last 5 years as shown below and it can be seen from the above table that 17% falls in MVA are certainly possible e.g. [2.88%-3.12%] MVA = 1.149 and this would be 17% less than 1.384 and MVAs higher than that have certainly been around in recent times. Note that when the table was constructed the MVA of 1.00 applied to yields of [4.13% - 4.37%] indicating that we are with interest rates (yields) still below "normal" values.
1683467748954.png
 

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Robzig said:
Maybe it would be good if an actuary explains the way TVs are calculated to clear up the confusion that seems to be present. I'm sure I read that @Colm Fagan is an actuary and he might be able to explain why TVs are not directly linked to annuity rates which Conan seems to be saying here
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Hi @Robzig I should preface my reply by saying that it's over 40 years since I practiced as a pensions actuary and more than ten years since I practiced professionally in any capacity. As many on this forum will attest, however, ignorance has never stopped me from commenting :)
The starting point for calculating the TV is the present value of the deferred pension payable from retirement. Thus, someone leaving a scheme at 40 might be entitled to a pension of €10,000 a year starting 25 years from now, at 65. The TV is the present value of that future series of regular payments. There is a possible overlay, however, which could be important in some cases. That overlay is to factor in the scheme's solvency position. Suppose there isn't enough in the scheme pot to meet total transfer values if everyone were to leave at the same time, then the transfer value for the one person leaving will have to be reduced so that they don't grab too much of the fund and not leave enough for others. That adjustment varies from scheme to scheme, and there's no way that I, or any other outsider who's not familiar with the innards of that particular scheme, can tell what the adjustment will be (either zero or a negative, never a positive). Therefore I'll ignore it in the rest of this post and assume that, in the above example, we're just calculating the present value of €10,000 a year, starting 25 years from now.
Obviously, an increase in interest rates reduces the amount that needs to be set aside now to deliver that €10,000 a year starting 25 years from now. Therefore, a rise in interest rates reduces transfer values.
There are other complications that I'm not that familiar with. For example, I understand that there is a requirement to revalue deferred pensions to allow for inflation (I've never had a DB entitlement, so I'm not familiar with it). If there is such a requirement, the TV should reflect it and an increase in the assumed future rate of inflation could cause the TV to increase. However, any such increase in expected future inflation would almost certainly be accompanied by an increase in the expected rate of interest and the two would largely balance one another out.
Also, if a scheme guarantees post-retirement inflation-proofing, that will have to be taken into account in the TV. Discretionary post-retirement increases in pensions in payment are different. There's no need to increase TV's for discretionary increases but some schemes may enhance TV's if such increases are granted on a regular basis.
I don't know if I've confused you utterly at this stage. I think I've confused myself!!
 
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Thanks Colm

What you've written makes sense to me.

So there's a statutory basis for calculating TVs as set out by Duke of Marmalade. This sets out the formula and the adjustments that needs to be made in the 10 years prior to retirement. The adjustments are based on the interest rates at that time. This is my point all along.......it is the formula and interest rates that determine the transfer value and not the annuity rates. Sure, there may be overlap between the two but that was never the point being made.

What Red Onion said is that the annuity cost is calculated and that this in turn gives a transfer value by giving an NPV to the annuity cost. But the guidance notes don't even once mention annuity rates. The basis described by Red Onion is not the statutory basis. What Red Onion said is what I understood Conan to be saying also. All I've been trying to do is to point out that the calculation basis is not driven by the annuity cost. From my first post

Robzig said:
The pensions guru in my job (the union rep) says this isn't quite right. He said that it's all to do with the increase in interest rates. This is the reason transfer values are now less than before and the reason annuities cost less as well. The main point he was making is that there is a formula for working out the transfer value which is independent of the cost to buying an annuity.
Click to expand...
 
It is indeed.....where people make up stuff!!:)
RedOnion said:
There are 2 steps to calculate a TV (without an enhanced value):
1. What's the capital value of the DB at NRA? Implied annuity rates are the most transparent way of calculating that.
2. What's the net present value of that? discounting using interest rates is the most transparent way of calculating that
Click to expand...
 
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