# Take Enhanced transfer value?



## Amand (18 Apr 2017)

My husband has joined a new company in the last few months and received a letter from his previous employer offering him an 'enhanced value' to transfer his DB benefits to another approved pension arrangement.

Statutory transfer from scheme €51,484
+20% company enhancement €10,297
Total transfer value €61,781

Should he consider this, given that he is 38 and sees himself working to retirement age of 65. He's married with three young children. Don't know what other information required?


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## Steven Barrett (18 Apr 2017)

What are the benefits he is giving up for the transfer value? What is the funding levels of the scheme? Is it in deficit? Even with the enhanced payment, it still may be less than the transfer value of a fully funded scheme. It's impossible to advise without an idea of what he is giving up. 


Steven 
www.bluewaterfp.ie


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## Amand (18 Apr 2017)

Hi Steven, 
The pension payable from normal retirement date would be €8435 pa. (Deferred pension) It's currently a fully funded scheme with one of the top irish food companies.


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## JoeRoberts (18 Apr 2017)

Bear in mind that the transfer value will increase by at least 7 per cent each year if he leaves it there and does nothing. This is due the the unwinding of the discount rate as he gets closer to retirement. There may also be some annual revaluation depending on inflation. All this assumes no funding problem arises but it is getting more difficult for schemes to close without substantial enhancements especially for profitable companies with schemes that are not in deficit. A number of schemes closed recently with enhanced transfer values of the order of six times depending on age and other factors. All trustees and advisors are familiar with the Omega pharma pension case a few years past which changed thinking in this area. So the 20% enhancement brings it to the value in less than 3 years. Not a great deal.


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## johnkieran (25 Apr 2017)

Is this not a real chicken and egg situation?

How do you make an informed decision on taking a TV versus remaining in the scheme?

Scheme is meeting minimum funding requirements according to OP yet an enhanced TV is being offered.  

Yet who knows what condition the scheme will be in by the time OP reached retirement age.

Is the prudent thing to do to transfer given everything we've seen and heard about DB schemes?

Will all DB schemes eventually give up the ghost and opt for closure/windup?

€61,781 in exchange for €8435 pa (Deferred pension) is obviously bad value but but but............ is a bird in the hand and all that?


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## Merowig (25 Apr 2017)

It is somekind of betting on the future - personally I would not accept the offer.
Also the more people accept transferring out of the DB scheme - the more secure will be the DB scheme for those who remained.
It is a bit of "gambling"


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## JoeRoberts (25 Apr 2017)

At the Op's age the TV calculation is skewed against him. He has a guaranteed pension from the scheme at retirement. But his TV calculation gives him an amount that must make a return _every_ year ( a bit less when within 10 yrs of retirement) of approx. 7% until retirement to give him a big enough fund to buy that guaranteed pension.
It seems he is in a good scheme and the company is willing to get him out. But their liability on their balance sheet (probably based on a discount rate of approx. 1.5%)  is much higher than their TV offer.


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## johnkieran (26 Apr 2017)

JoeRoberts said:


> Bear in mind that the transfer value will increase by at least 7 per cent each year if he leaves it there and does nothing. This is due the the unwinding of the discount rate as he gets closer to retirement. There may also be some annual revaluation depending on inflation. All this assumes no funding problem arises but it is getting more difficult for schemes to close without substantial enhancements especially for profitable companies with schemes that are not in deficit. A number of schemes closed recently with enhanced transfer values of the order of six times depending on age and other factors. All trustees and advisors are familiar with the Omega pharma pension case a few years past which changed thinking in this area. So the 20% enhancement brings it to the value in less than 3 years. Not a great deal.



Are you suggesting that it's in the members interests to remain in the scheme because any future TV is somewhat protected by the Omega case?  Is the Omega ruling that significant?

What would happen to TVs if deferred benefits were severely reduced as in the INM case?  Would the Omega ruling protect TVs in this instance?

Can you explain what you mean by TV "of the order of six times".  What does 6 times refer to?



JoeRoberts said:


> At the Op's age the TV calculation is skewed against him. He has a guaranteed pension from the scheme at retirement. But his TV calculation gives him an amount that must make a return _every_ year ( a bit less when within 10 yrs of retirement) of approx. 7% until retirement to give him a big enough fund to buy that guaranteed pension.
> It seems he is in a good scheme and the company is willing to get him out. But their liability on their balance sheet (probably based on a discount rate of approx. 1.5%)  is much higher than their TV offer.



Of course highly, highly unlikely a return of 7% could be achieved.  But as against that, the pension is not guaranteed. Surely that's the nub of this discussion.



Merowig said:


> It is somekind of betting on the future - personally I would not accept the offer.
> Also the more people accept transferring out of the DB scheme - the more secure will be the DB scheme for those who remained.
> It is a bit of "gambling"



I'm coming to the conclusion that it's exactly that - a gamble.  And you won't know if you've won until such time as you reach retirement i.e. did the scheme sponsor deliver the promised deferred benefits or was the TV route the way to go.


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## cremeegg (26 Apr 2017)

I dont have the expertise of the other posters with regard to DB schemes, but I would like to offer this thought.

If the scheme continues for the duration and meets its obligations then that is an excellent outcome, much better than accepting the ETV offer and any likely return it might make.

In the further 27 working years ahead of him, will he be contributing to a DC scheme.

No one can tell you which option will produce a better result as no one can foretell the future. But some DB entitlements together with 27 years of a DC scheme seems better than all DC.

I would not accept the ETV offer.


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## jjm (26 Apr 2017)

Waterford crystal was a top Irish company at one time.The whole group may be a top Irish company check is his pension is  in a company they took over it may not be as secure.


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## JoeRoberts (27 Apr 2017)

johnkieran said:


> Are you suggesting that it's in the members interests to remain in the scheme because any future TV is somewhat protected by the Omega case?  Is the Omega ruling that significant?
> 
> What would happen to TVs if deferred benefits were severely reduced as in the INM case?  Would the Omega ruling protect TVs in this instance?
> 
> ...



In the OP's specific case, the scheme is not closing. They made an offer to encourage members to exit. It is a solvent scheme even after the dramatic increases in liability costs in the past few years. So we cannot lump it in with the "problem" schemes like INM, Waterford etc.

Omega case may or not apply, it may depend on the rules of the trust deed, specifically who has the power to set the contribution rate. In the Omega case, the scheme actuary had the absolute power to determine the contribution rate and he requested a final contribution on closure based on a lower discount rate (think it was around 4% back in 2011). If it is an old scheme it is possibly similar to the rules in the Omega case. Regardless, what Omega has done is set out clearly that when a scheme is closing, the standard transfer value ( which is based on rates determined by the Dept of SW) is only the minimum and the Trustees are entitled ( and quite possibly now _required_) to request a more favourable TV that properly reflects the value of accrued benefits.  This of course requires a strong set of Trustees or someone to put the pressure on them.

My reasoning for the OP is mainly based on his age - If the OP was in his mid/late 50's and offered 120% ETV then it needs to be considered very differently than the OP who is 38. At his age he has little to gain as his standard TV will be up 20% in less than 3 years anyway. There is a risk of course, but I think it is one worth taking when everything is considered.

In my view, basing an ETV on a % of standard TV is less advantageous for younger members than older members. A more equitable method may be to calculate the enhancement based on lower discount rates across the board. In this way, everyone gets a figure closer to the current market value.

 Regarding your "6 times" query, a scheme closing using a discount rate of say 1% would have a very large impact for young members, up to 6 fold for members in their early 30's. This is because there is such a long period to retirement and the benefit of using low rates is magnified. If the OP went to an insurance company to buy a deferred annuity policy payable at age 65, the cost would be based on an interest rate of less than 1%. This is the market value of his pension.


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