# Key Post: Pensions - Actuarial valuations



## Brendan Burgess (31 Aug 2002)

I have a defined benefits scheme from a previous employer. I have 10 years service built up. The amount of the benefit when I left last year was c EUR18000 and will be indexed at the lower of CPI and 4%. At 4% this would be a benefit of cEUR 42,000 at age 60, I am 39 at present.

If I popped me clogs tomorrow, the missus would get the lower of my contributions or the actuarial valuation of the future benefit.

Has anyone a clue as to what the actuarial valuation would be (ball-park). How would this fall over time?

The reason I want to know is I am putting life cover in place at the moment and I don't want to buy too much?


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## survivors pension (2 Sep 2002)

*deferred pension*

I am also a male with a deferred pension from my old company with 10 years service.  the scheme is defined benefit - there is an immediate spouses pension of 50% on death before age 65 - there is no children's pension.  it is only in the situation where there is no spouse that the actuarial calculation of contributions calculated by cpi up to a ceiling of 4%


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## d53 (2 Sep 2002)

*Actuarial value*

The actuarial value is the transfer value.  You can ask the scheme to calculate this.

The transfer value increases over time, so the figure you get will just be the current value.  For your life insurance purposes, you would be safe enough to assume that it will increase at about 8% per annum.

d


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## Mercdriver (2 Sep 2002)

*Pensions - Actuarial valuations*

d53

Does this mean €18000 inflated at 8% per annum?


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## ClubMan (2 Sep 2002)

*Re: Pensions - Actuarial valuations*

*you would be safe enough to assume that it will increase at about 8% per annum.*

This 8% isn't being incorrectly confused with the mandated figures for projected growth used in IIF compliant life assurance projections - as opposed to a figure which is related to actual guaranteed growth - by any chance?


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## d53 (2 Sep 2002)

*8% growth*

Clubman

The 8% is an approximation of how a transfer value will grow each year, and it's a ballpark stab at the rate of discount likely to be used in the transfer

d


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## Mercdriver (3 Sep 2002)

*Pensions - Actuarial valuations*

I am not at all clear following the various replies!!!

I think it best to contact the scheme directly and ask for the current transfer value and ask how this will increase  over time in the event of a payout to my spouse prior to the defined retirement defined benefit.

I'll post this amount in due course for information purposes and comment.

Thanks for input to date.


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## transfer value (3 Sep 2002)

*I got a transfer value from my scheme recently*

I am transfer my pension from my current defined benefit scheme to another scheme.

I got a transfer value and it seems to be only 4.75% - this appears to be very low considering the above comments - which I found extremely beneficial.


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## Homer (3 Sep 2002)

*Re: I got a transfer value from my scheme recently*

Dear mercdriver

The amount payable as a transfer value is the current actuarial value of your preserved pension entitlement.  

There is a standard basis set down by the Society of Actuaries in Ireland for carrying out such calculations. In broad terms, there are four components to the calculation, as follows:

1.  Project forward your pension to your normal retirement age 

2.  Multiply the projected pension by an annuity factor 

3.  Discount the result to a present value

4.  Apply a market value adjustment

If standard Pensions Act revaluation terms apply to your pension, the rate of future increase currently assumed under the standard basis is 2.5% per annum.

The annuity factor will depend on your gender, your normal retirement age (NRA) and the type of pension you will receive from NRA i.e. whether there is a spouse's pension and whether and by how much the pension will increase in payment.  Please note that the annuity factor represents the expected cost to the scheme of providing your pension and is likely to be somewhat lower than the cost of buying a comparable annuity on the open market.  Typically, the factor would be somewhere between 9 and 15.

The discount rate specified under the standard transfer value basis is 7% per annum.

The market value adjustment (MVA) reflects current fixed interest and index linked bond yields.

In broad terms, you should expect the transfer value to go up by around 7% from one year to the next.  The actual increase will vary depending on changes in the MVA and whether the rate of increase in your preserved pension is more or less than the projected rate of 2.5%.  It may also change over time if there is a change in the underlying basis.

The main reason for taking a transfer value would be in the expectation of achieving a higher benefit than leaving the pension where it is.  In order for this to happen, you would need to achieve a return net of expenses of approximately 4.5% more than inflation, plus a further margin to cover the difference between the annuity factor used in the transfer value calculation and the annuity rates you will receive on retirement (anyone's guess).

It's up to you decide how difficult or otherwise you expect it to be to achieve investment returns at this level.  You might also decide to take a transfer value for other reasons such as administrative convenience or accelerated vesting in your new employer's pension scheme, but such factors would tend to carry more weight in relative terms in cases where the amount available for transfer is relatively small.

I hope this gives a broad picture of how transfer values work.  There are some wrinkles that apply in certain cases, but I have left these out in order to avoid confusing what is already quite a complicated subject.

Regards
Homer


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## Homer (3 Sep 2002)

*Re: Pensions - Actuarial valuations*

Hi mercman

Further to my earlier posting, I estimate that your current transfer value would be between €90,000 and €115,000, depending on whether or not the pension increases in the course of payment.

This is based on the data you provided and assumes your pension is payable from age 60 with 50% spouse's pension.

I hope this helps.

Regards
Homer


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## Mercdriver (4 Sep 2002)

*Pensions - Actuarial valuations*

Homer,

Thanks very much for your contributions, especially the explanation of how the transfer value is estimated and your ballpark estimate of the transferrable value. 

The expert advice I have been give to date is to leave the defined benefit pension in place to 60 rather than transferring it to another scheme. However as I said at the outset, I wished to get some idea of the quasi-life cover it generates rather than buy all that life cover that a salesman says I should have!

Thanks
MercDriver


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## Homer (4 Sep 2002)

*Re: Pensions - Actuarial valuations*

Hi MercDriver

My own inclination would be to agree that you should leave the preserved pension where it is, but it is very much a matter of personal preferences, attitude to risk, overall financial circumstances, etc. etc.

Regarding the amount payable on death, your original posting said that it would be the lower of the actuarial value or a refund of your own contributions to the scheme.  I presume this should read the higher of the two.  Under the Pensions Act, the trustees are obliged to pay out the actuarial value of any preserved benefits on the death of a preserved pensioner, unless they are paying an immediate pension to a dependant.  I presume an immediate dependant's pension does not apply in your case.  

You should ask the administrator of your former pension scheme for a current statement of your options and you should have received such a statement automatically when you left service.  This will enable you to plan your overall life cover more effectively.

As I explained in my earlier posting, you can expect the actuarial value to trend upwards at the rate of 7% per annum.  By leaving your preserved pension where it is you therefore have a gradually increasing level of life cover, albeit subject to (hopefully) minor short term fluctuations from time to time.

Regards
Homer


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## transfer value (21 Sep 2002)

*I got a transfer value recently*

Hi Homer 


I am reading thru your reply of Sept 2 and note that the four factors involved in the calculation.  The second one - annuity factor is of interest to me

Part of my pension has a normal retirement age of 60 and it now appears that part has a normal retirement age of 65 - this is at least confusing and its presence highly questionable as it is only being stated now and seem to be retrospective .

Even if a split nra is used and the approriate gender factor the amount comes no where near the 7%.

The scheme is a defined benefit scheme but recently expressed as a target benefit scheme.   In light of this would it be better for me to transfer even though it seems a very low transfer value.


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## Homer (21 Sep 2002)

*Re: I got a transfer value recently*

Hi TV

The split retirement age is probably due to European sex equality legislation.  There was an earlier thread where this was discussed in some detail - perhaps someone can post a link to it.

You say that your scheme is defined benefit but "recently expressed as a target benefit scheme".  If it has changed to a target benefit scheme, your entitlement is calculated on a defined contribution basis, with an undertaking by the employer to review contribution rates by reference to a targeted level of retirement benefit.  

Any such change should have been clearly communicated to members and consent obtained to the change.  If not, you may have a case for insisting that your entitlement should be calculated on a defined benefit basis.

As regards the calculation itself, the annuity rate will reflect your future life expectancy at NRA (using the actuarial tables specified in the standard transfer value basis) and whether there are dependants' pensions and/or increases in payment.  As stated in my earlier posting, a typical factor would be in the range of 9 to 15 times the annual pension.

Before deciding what to do, you should clarify whether the scheme is defined benefit or not and your decision should take account of your overall financial circumstances, attitude to risk, etc. etc.

Regards
Homer


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## Liam D Ferguson (23 Sep 2002)

*Re: I got a transfer value recently*

Hi Homer, 

I think  is the topic about splits.

Regards, 

Liam D Ferguson
www.ferga.com


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## transfer value (6 Oct 2002)

*I got a transfer value recently*

Thank you for link and also transfer value.

Two points seem to be important:  equality legislation said had to equalise but the scheme seemed to have equalised to a higher age i.e. 65 where it was 60 without informing me or my female colleagues and therefore very high loss.

Regarding the type of scheme; I was listening to UK television recently where there is a debate around a financial report standard which is causing a  lot of problems for pension schemes which was not anticipated.  So hopefully the scheme remains a defined benefit scheme

However in light of all that is going on even if the transfer value is only around the 4+% it might be better to into a scheme where the interpretation of rules seem to downgrade the benefits all the time.

all views and reponses of great help


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## Homer (7 Oct 2002)

*Re: I got a transfer value recently*

Hi TV

You should have been informed of any change in the scheme rules at the time the change occurred.  Is it possible that it was dealt with as part of a broader overall communication exercise and that you did not realise the impact at the time?

The accounting standard that is causing a lot of problems for defined benefit pension schemes is FRS17.  I won't get into a debate on the pros and cons of the standard, but it's possible that it may be a contributing factor if your employer decides to change from defined benefit to defined contribution.

I presume that the 4% you are referring to is the statutory revaluation of your preserved pension.  If you have not yet taken the transfer value offered to you, you can expect this value to trend upwards at around 7% per annum as you get closer to retirement.  See earlier postings in this tread for more details.

Ultimately it's your choice as to whether or not you accept a transfer payment, but if you are planning to go ahead, there may be an advantage to seeking a fresh transfer value quote in order to take advantage of the recent reductions in bond yields, which should cause the transfer value to have increased since it was last quoted.

Regards
Homer


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## transfer value (19 Oct 2002)

*pension val*

Thanks for comments - 

1.  regarding the change to a higher normal retirement date - there was a communication as a statement which said the scheme had to equalise.  Everyone had 60 at the time- men by default and women by right - and the scheme changed to 65 and no justification why they selected 65.

Colleagues  who did enquire over the last 10 years were not informed of any changes to their pension entitlement at age 60 - none of the paperwork indicated anything other than a normal retirement age of 60 and all purchase of additional years  were based on 60.   It is only this year that the split  happened.  Also the practice was not to change benefits retrospectively and the financial effect of future loss of five years pension should have been individually notified at the time and not 10 years later.   One would have thought there would have been a duty of care on the part of everyone to give accurate information.    People who have left over the last five years or so and now want to come back at 60 wanting their pension will have some interesting possibilities without knowing it.  

2.  The change in the annual report to describe the scheme as a target benefit scheme is certainly causing great debate and the employers are adamant - benefits will be reduced if there is no money coming from the employers 

3.  Thank you for your advice - will go back - the figure I got was called the transfer value - it was not the deferred value so I will go back and clarify the transfer value.

TV


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## Homer (21 Oct 2002)

*Re: Communication*

Hi TV

I imagine that any change in normal retirement age would apply only to service after the change was made.  People who left service prior to the change should therefore not be affected.  

This does not give the employer the right to change entitlements in respect of future service without notifying the members.  Legally, they don't have to give any justification for the change, but they probably should have from an IR perspective.  

What may have happened is that they may have communicated the change in such a way that employees who did not pay full attention to what they were being told (the vast majority of the members?) did not realise exactly what was happening.  Legally, they may well be in the clear.  

Regarding the change to target benefits, they may not be on such firm ground.  If the employees did not agree to the change, the employer should not have been able to change the basis on which their past service entitlement is calculated.  Are you sure that you didn't sign anything in the recent past agreeing to such a change?

Regards
Homer


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## transfer value (26 Oct 2002)

*frs17 and equalisation*

Hi Homer - thank you for the reply.

1.  FRS17 target benefit scheme - this was done by the employer to meet the accounting requirements and no consultation or agreement with anyone - financial reports do not get agreement they are just implemented by finance and board and they are adamant that there is no employer liability 

2.  The change in normal retirement age for people who left after the change is interesting.....because it is only now 10 years later that a split has occurred.   Individuals who did enquire after the change were told that they have what they hold and this meant in respect of future service and neither the employers or the fund administrators (which is independently funded) gave any indication that changes were being made in respect of future service - it was not a case of paying attention sufficient questions were asked which were not answered .

As I am not a legal person I would have expected that the fund and the employer should have come clean and when individuals asked for benefit statements that the normal retirement age and all the purchase of additional years should have been changed to reflect a higher age?  My friends state that legally they cannot be in the clear because they did not come clean....

Thanks very much again for your interest - I am glad I am considering tranferring but with my new job I havent yet contacted the scheme for a new transfer value but will


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## Homer (27 Oct 2002)

*Re: frs17 and equalisation*

Hi TV

FRS17 does not give an employer the right to retrospectively change how its pension scheme works from defined benefit to target benefit.  FRS17 is an accounting standard and how the company prepares its accounts is generally not of concern to the employees (provided they are fair, honest, etc.).

How it operates its pension scheme is however a matter of fundamental importance to the employees.  A company cannot use an accounting standard as justification for a retrospective change in employees' entitlements.

You should seek further clarification from your employer of what exactly is going on in relation to the pension scheme.  If you don't like the answer, talk to the trustees.  If you get no satisfaction from the trustees, talk to the Pensions Board.

Regards
Homer


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## transfer value (30 Oct 2002)

*frs17*

thank you for this  - it puts the mind at ease but it also means that the employers will use any technicality to change employees entitlement - same mindset as what was done in respect of equalisation of nra for females - however I understand they are still fight.


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## Homer (30 Oct 2002)

*Re: frs17*

Hi TV

Be careful you're not jumping to conclusions.  I know that it sounds like the employer is trying to pull a fast one, but you may be getting the wrong end of the stick.  You should make sure that you're aware of all the facts before accusing them of using a technicality to change employee entitlements.

By the sound of things, you've totally lost trust in your former employer and that in itself may be sufficient reason to take a transfer value rather than remain in the fund.

I suggest that you write to them asking for a statement of your options and keep a copy of the letter as proof that you requested the information.  When you get a response from them, you will be in a better position to decide whether or not to take the transfer payment and whether you are being offered less than your full entitlement under the rules of the plan.

Regards
Homer


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## tv (3 Nov 2002)

*transfer value*

I am not the only one - have written twice and still no reply


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## defined contributions FRS17 (6 Nov 2002)

*changing the benefits due to FRS17*

I have been reading the above.    My scheme has done exactly what has been described.   The company accounts now state that the scheme is a target benefit scheme to comply with FRS17 and the company has stated that the scheme is now a target benefit scheme and therefore not guaranteeing the two thirds pension if the funds cannot meet this.   The scheme provides for the deficit to be made up by increased contributions but the employers are stating that they have no liability.   The scheme is in the state sector.


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## dc v db (9 Nov 2002)

*frs17*

my company has now said that the frs17 has meant that the pension scheme as far as they are concerned is a defined contribution -
previous annual accounts stated defined contributions

can they do this?

Also is there any chance that FRS17 will be changed for this years accounts so that this nightmare situation can be dealt with?


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## Homer (9 Nov 2002)

*Re: frs17*

This whole discussion baffles me.

I don't see how any employer, public sector or otherwise, can use an accounting standard as justification for retrospectively disimproving someone's conditions of employment.

Most trust deeds allow the employer to amend or discontinue the scheme at any time, but subject to members retaining their accrued rights in respect of service prior to the change.  That does not prevent an employer from seeking the employees' consent to a change in how their accrued rights are determined (for example, by accepting a defined contribution transfer in exchange for your accrued rights), but they should not be able to do this without the employees' consent.

As regards FRS17, the full implementation has been deferred, but it is still required as a disclosure item in company accounts.  Whether it will be abandoned in time to save what remains of the defined benefit market remains to be seen.

Regards
Homer


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## ajapale (19 Feb 2006)

Bumped by ajapale


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