# Formula for Transfer Value to Buy out Bond



## cronley (14 Mar 2008)

Below is reply I got from Pension Board about Formula for calculating Transfer Value to Buy out Bond. Society of Actuaries is closed for weekend - does anyone know the formulas used for purposes below -
I have preserved pension benefits in a Defined Benefit scheme with a private company which I left a few years ago - I was a member of the scheme for 30 years - I have not started to draw pension from the scheme.
I am looking for 2 formula -
1. Formula for calculating Transfer Value to Buy out Bond
2. If I die before drawing pension from scheme, or before transfer to Buy out Bond, what is formula for calculating payment of entire preserved benefit lump sum to my estate.

Reply from Pensions Board
"The Pensions Board is responsible for the monitoring and supervision of the Pensions Act, 1990 as amended (“the Act”) which is the legislation governing occupational pension schemes and PRSAs (Personal Retirement Savings Accounts).  

I understand that you query relates to defined benefit transfer values . I have outlined below general information below which I trust is of assistance. 

The transfer payment in respect of a preserved benefit or part of a preserved benefit which has been determined on a defined benefit basis is the actuarial value of such preserved benefit (including the value of any prospective revaluation and the benefit which would have been payable if the member had died before NPA) at the date of receipt of the application for a transfer payment or on a date selected by the trustees which is not earlier than three months before, nor later than three months after, the date of receipt of the application.  

Such transfer payments must be calculated in accordance with any guidelines issued by the Society of Actuaries in Ireland (or with any other applicable guidelines) and specified in regulations.  

The Society of Actuaries in Ireland produces the guidelines for calculation of transfer values and are available from their offices, contact details below:

*The Society of Actuaries in Ireland*
102 Pembroke Road
Dublin 4
Ireland

Tel: + 353 1 660 3064
Fax: + 353 1 660 3074
E-mail: info@actuaries.ie

If its rules permit, as scheme may opt to provide a pension on a proportunate basis for payment to the surviving spouse and/or other dependents in the event of the members death before the preserved benefit becomes payable.

If such a pension is not provided and a member who is entitled to a preserved benefit dies before the benefit becomes payable, an amount must be paid to the member’s estate which is equal to the value of the preserved benefit immediately prior to his or her death."


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## hlm (17 Mar 2008)

The formula for calculating a transfer value depends on various assumptions that are based on guidelines issued by the society of actuaries (mortality, interest rate assumptions) and then other factors will be scheme specific (retirement age, pension increases, what portion of your pension is subject to revaluation pre retirement, whether there's a spouses pension in the scheme, is the scheme solvent, ie can it meet all it's liabilities ). The only way to get this done accurately is to request it from the scheme actuary. You are entitled to this information once a year, and transfer values are usually guaranteed for 2 months. Why do you need it so urgently?


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## cronley (17 Mar 2008)

Him
Thanks for the reply.
Are there separate formula - one to calculate Transfer Value - is there a different one to calculate total lump sum payout to my estate if I died before doing transfer to buy out bond.
I was hoping to get the formulae, so that I could work out the figures myself at any time, rather than only get them once a year from the scheme actuary - is this possible.


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## boaber (18 Mar 2008)

Probably not, as the scheme actuary could reduce the transfer value available if the scheme was underfunded.

Have a look at www.actuaries.ie for more info.  Professional Guidance Note GN11 deal with Retirement Benefit Scheme Transfer Values.


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## cronley (18 Mar 2008)

Thanks Boaber. Had a look at that Guidance Note. Looks very complicated. Looks like I will have to get the Transfer values from the scheme actuary.


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## Homer (19 Mar 2008)

Hi Cronley

The Professional Guidance Notes were superseded by Actuarial Standards of Practice (ASPs) with effect from 30 December 2006. The relevant ASP covering transfer values is ASP PEN-2. This is broadly similar to the old GN11, but some of the financial assumptions are changed.

ASP PEN-2 is reviewed on a regular basis in the light of changing market conditions and the financial assumptions have been changed twice in the last year - on 1 May 2007 and 1 November 2007.

This doesn't make it any easier for you to calculate the transfer value, but the general principle is that, *if there is no change in the underlying assumptions*, transfer values should increase each year in line with the assumed long term rate of return (currently 7.25% p.a.) until you get within ten years of retirement. When you are within ten years of retirement, the rate of increase slows down and transfer values are also subject to fluctuation in line with movements in long bond yields. If there is a change in the underlying assumptions, there will be a further adjustment upwards or downwards. 

As pointed out by other posters, there is also the possibility that your transfer value could be reduced if your scheme is underfunded. Recent falls in market values make it more likely that a reduction might apply if you were to request a transfer payment at this time.

Regarding what happens on death prior to retirement, unless there is an immediate pension payable to your spouse or other dependent (which is relatively uncommon), the amount payable on death is calculated in exactly the same way as a transfer payment to another scheme i.e. in line with ASP PEN-2.

Hope this helps.

Homer


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## cronley (20 Mar 2008)

Homer
Many thanks for your very helpful reply.
I am 6 years from retirement. The 7.25% annual return is fairly good & is an argument for not transferring to Buy out Bond. If I did transfer, I would put money in Guaranteed Fund, due to my age, & I doubt if Guaranteed Fund would return 7.25% PA. Would you share this view.
You say 7.25% is guideline return if more than 10 years to retirement. What is guideline % for 6 years to retirement.
The reason I am trying to get the formula for calculating Transfer Value, is to get some transparency. How do I know if the scheme actuary makes a mistake in the calculation - or does not not treat me fairly - the whole process seems very secretive.


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## Homer (24 Mar 2008)

cronley said:


> I am 6 years from retirement. The 7.25% annual return is fairly good & is an argument for not transferring to Buy out Bond. If I did transfer, I would put money in Guaranteed Fund, due to my age, & I doubt if Guaranteed Fund would return 7.25% PA. Would you share this view.


 
If you are risk averse and therefore planning to invest in a low risk/low return fund, it's very unlikely that the return you will get pre-retirement will match the discount rate underlying the transfer value calculation. Furthermore, the annuity factor that is used to capitalise each euro of annual pension is somewhat lower than current immediate annuity rates and therefore, if you are planning on using the proceeds to buy an annuity when you reach retirement age, you are likely to be significantly worse off by taking a transfer value than if you just leave your pension where it is and draw it down when you reach normal retirement age.

The above answer assumes that your pension scheme is currently solvent and will remain so until you reach normal retirement age. If it is currently "below water" and offering reduced transfer values, you would have to balance the current reduction against the likelihood of the position getting either better or significantly worse before you reach retirement age. If the former, then this would clearly strengthen the case for leaving the money where it is; if the latter, then there is a possibility (hopefully fairly remote) that you could end up with nothing or that the scheme could be wound up before you retire subject to a greater reduction than currently applies. 

Apologies if this seems alarmist; the majority of DB schemes *should* end up being able to meet all their liabilities, but I just wanted to paint a full picture. However, if you have concerns about the continuing viability of the employer, you should make further enquiries about the financial health of the pension scheme, just to be on the safe side.



cronley said:


> You say 7.25% is guideline return if more than 10 years to retirement. What is guideline % for 6 years to retirement.


 
Over the last ten years prior to retirement, the rate is reduced gradually from the long term rate (currently 7.25%) to the short term rate (currently 4.5%). The formula used to achieve this is set out in section C.1 of the Appendix to ASP PEN-2.



cronley said:


> The reason I am trying to get the formula for calculating Transfer Value, is to get some transparency. How do I know if the scheme actuary makes a mistake in the calculation - or does not not treat me fairly - the whole process seems very secretive.


 
ASP PEN-2 sets out the process in detail and does not give the scheme actuary the option to "treat you unfairly". It's also very unlikely that a mistake would be made in the calculation as these calculations tend to be computerised, but you always have the option of hiring an actuary to check the amount quoted, if you have concerns about its accuracy.

Regards
Homer


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