Exec Pension - Nominal Value vs. Surrender Value

J

JJ2000

Registered User
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23
Hi

I've been happily horsing in money to my exec pension for the last 5 years or so, and each year (and when I phoned them up) I got an update of the value of the fund, called the nominal value.

This year, for the first time in any statement I've got off them, I was shown two figures - the nominal value, and the surrender value. Now, there's quite some difference between these 2 figures, the surrender value being about 30% less than the nominal value.

I should clarify that the nominal value as at the date of the statement assumes you'll stay until retirement with them, but the surrender is the value at the date of the statement should you want to surrender or switch the fund out of that company to another (??puzzled - I was??)

Apparantly, this is based on some Actuarial Calculation (i.e. completely made up to stop you switching) and I've complained to the Life company that this is plain ridiculous and is also anti-competitive - but all I've got is the usual predictable blah that it was in the tortuous legal interpretation of the pension contract. In the contract, it did refer to the surrender value concept, but gave no indication as to how stark the difference could be (30%!!) nor was it very clear (in my view) what was meant by another fund.

How can the value of the pension, on the same date, be two different things? On what basis can they invent an arbitrary (approx 30%) difference?

I'm thinking of taking this further to the financial services ombudsman but I was wondering if anyone else has had similar stark differences outlined to them, and complained, and had any success in getting the Pension company to admit that the value of the pension is the value of the pension - no funny business of it's today X if you stay with us and it's Y today if you head off somewhere else.

Any thoughts/insight gratefully received

Thanks
 
Can you clarify precisely who your pension is with and what type of fund it is? Did you check/read your policy's detailed terms & conditions to check precisely the nature of your pension policy? From the details that you've posted I strongly suspect that is a With Profits pension fund. WP funds often have a nominal and surrender value with the former being less than the latter due to exclusion of certain terminal/maturity bonuses that only kick in at maturity and also penalties or Market Value Adjustments (MVAs) which are reductions in value that apply in certain premature encashment (including transfer to another pension fund) scenarios. Up to 30% reduction in value would not be unusual in such circumstances. Note also that WP funds are normally more conservative than other pension/investment fund options and, as such, not always the best option for somebody with many years to go to retirement. If you have a long way to go to retirement you might want to look at putting further pension savings into a more aggressive, high equity, high risk/reward profile fund and either leave the WP (if that's what it is) fund where it is or take the transfer hit if you think that in the long term you will earn enough to make this up and generate more growth in the long term (not easy to predict). I don't understand why you only got a statement this year and not the past four (?). You should ask about this.
 
Hi Clubman

Thanks for your reply.

Sorry if my earlier post was a bit fuzzy/unclear -to answer some of your questions:

-the pension is with Canada Life

-I did get statements for the first 4 years. It's just on each of these statements all that was stated was the (nominal) value of the fund, so there was just one "value" on each of these 4 statements - it's only on the most recent statement (for the year just gone, the 5th year) did they show 2 "values" - a nominal and a "surrender" -this was the first time I'd ever seen a surrender value and the first time it was transparantly shown on any statements that there were 2 "values" and that the difference was fairly stark -- the surrender being 30% LESS than the nominal -- hence this triggered me into getting into a formal complaint with Canada Life

- Canada Life offer a choice of a few funds; at the start (for the first year or two) I was with some of their Setanta funds, in some of Setanta's Equity and Property funds, after that I was mostly in a Cash fund for about 6mths - 1yr (around 2003 when equities were bombing) but in the last 2 years I've been in Canada Life/BIAM managed - which I don't think is a "with profits" fund, and it's been doing quite OK in the last year or so

I don't know if this sheds any more light, but I'd be interested in any views and especially if anyones seen on their statements two "values" and that there was such a stark difference, and did they complain and how they got on?

Thanks again
 
Before complaining you really need to give them a chance to explain the latest statement and why it differs from previous ones. You also need to ascertain precisely what sort of fund(s) your pension is invested in. From you initial post it sounded very likely that there was a WP fund in there somewhere but you seem to doubt this. Maybe you can post details on what funds you are and have invested in and when over the 5 years to date? Have you contacted CL about this and, if so, what have they said?

On a more general note you really should think twice about investing your pension in cash/bonds, WP funds or other relatively conservative funds unless you are nearing retirement/pension drawdown age.
 
Thanks for the reply - to answer some of your questions:
(1) I asked CL about why this years statement differed from the previous 4 years; when dealing with CL for the past 4 years I should explain that I was dealing with a Financial Adviser who used to get me the updates and up-to-date figures, but the formal annual statements were issued from CL centrally (from their Pensions Operations division). So I wrote to CL and asked why on this (the 5th statement) did it have the Surr and Nom values but it was never on statements 1-4 - their answer was along the lines of that the records they had in their offices were that the statements showed both Nom and Surr and they couldn't explain why mine only showed Nom - they suggested that the statements could have been altered in some way before I received them. I must say, that this line of response worries me quite a bit.

(2) I can double check exactly the types of funds, and how long I was in them along the way in the last 5 years; having looked quickly at them just now i can see i was in a "guaranteed prof" type fund for a bit, and cash for a bit, but this was only for about a year when everything else was falling apart (esp equity based funds) - I suppose the point I'd ask here is, even if I had a brief foray into these type of investments (for 1 yr out of 5) am I going to be punished forever? At the moment, and for the last 2yrs or so, all my funds have been in the CL/BIAM pension managed...

(3) I appreciate your point on watching investment into cash/bonds unless I'm nearing retirement; as I mentioned above I'm now 100% (and have been for 2yrs) in a "pension managed" fund and I may well stay that way for a while yet, sliding gradually over to more conservative funds as I get nearer to drawdown, as you point out

(4) At this point, I've fairly much been through the mill with CL, using their formal complaint mechanism, in terms of letters objecting to the discrepency between Nom vs Surrender, and why wasn't this shown on any previous statements, and also how can their Nom vs. Surrender be so (apparantly, and to me) large, and I've got fairly much got nowhere, and I'm not at all happy with their responses.

What I'm wondering now, is this: Is it worth my while taking this further to the Financial Services Ombudsman / IFSRA ? or am I wasting my time ?
 
JJ2000 said:
(1) I asked CL about why this years statement differed from the previous 4 years; when dealing with CL for the past 4 years I should explain that I was dealing with a Financial Adviser
Click to expand...
What sort of FA?
who used to get me the updates and up-to-date figures, but the formal annual statements were issued from CL centrally (from their Pensions Operations division). So I wrote to CL and asked why on this (the 5th statement) did it have the Surr and Nom values but it was never on statements 1-4 - their answer was along the lines of that the records they had in their offices were that the statements showed both Nom and Surr and they couldn't explain why mine only showed Nom - they suggested that the statements could have been altered in some way before I received them. I must say, that this line of response worries me quite a bit.
Click to expand...
Did you not get copied by CL on all of the statements sent to your FA? or did they issue their own?
(2) I can double check exactly the types of funds, and how long I was in them along the way in the last 5 years; having looked quickly at them just now i can see i was in a "guaranteed prof" type fund for a bit,
Click to expand...
Guaranteed Prof(it?) again sounds suspiciously like a variation on the With Profits theme.
and cash for a bit, but this was only for about a year when everything else was falling apart (esp equity based funds) - I suppose the point I'd ask here is, even if I had a brief foray into these type of investments (for 1 yr out of 5) am I going to be punished forever? At the moment, and for the last 2yrs or so, all my funds have been in the CL/BIAM pension managed...
Click to expand...
Not sure what you mean by "punished". Did you clarify the terms & conditions applicable to the various fund switches and the impact that these might have on your ongoing fund value, charges etc.?
(3) I appreciate your point on watching investment into cash/bonds unless I'm nearing retirement; as I mentioned above I'm now 100% (and have been for 2yrs) in a "pension managed" fund and I may well stay that way for a while yet, sliding gradually over to more conservative funds as I get nearer to drawdown, as you point out
Click to expand...
What is the actual or maximum equity content on the "pension managed" fund? In most cases for people with many years to retirement a fund that puts up to 100% in equities may be suitable.
(4) At this point, I've fairly much been through the mill with CL, using their formal complaint mechanism, in terms of letters objecting to the discrepency between Nom vs Surrender, and why wasn't this shown on any previous statements, and also how can their Nom vs. Surrender be so (apparantly, and to me) large, and I've got fairly much got nowhere, and I'm not at all happy with their responses.
Click to expand...
Did you make it clear to them that these were the two specific issues that you were complaining about? Did you put everything in writing?
What I'm wondering now, is this: Is it worth my while taking this further to the Financial Services Ombudsman / IFSRA ? or am I wasting my time ?
Click to expand...
If you are not happy with the responses so far then you should keep at it until you are.
 
In simple terms, the difference between the Nominal and Surrender values is one of initial charges and commission.
The Nominal Value is generally the gross value, i.e. the number of units multiplied by the unit price. The surrender Value is the net value after taking into account the un-recouped charges, i.e. the actual value they would pay out as a Transfer Value.
This type of difference usually arises where so called "Initial Units" are involved. This means that whilst there was no explicit upfront charge (e.g. 60% allocation in year 1), the upfront charges were recouped by investing the first 2 years contributions, or so, into Initial Units. These Units have a higher management charge (i.e. they grow at a slower pace), but if you seek to exit the plan before normal retirement age then they recoup the uncollected charges is one bullet. Thus the difference between the Nominal and Surrender Values.
Maybe not so simple after all.
 
Gak! :( I'd forgotten about horrible, opaque, hefty "initial units" charging structures. Thanks for pointing out this as a likely explanation. Still wonder why they were not reflected in all statements all the way along?
 
Forget about Nominal Value. This value is meaningless - though they will pay it in the event of death before retirement.

It is not a real value. The real value is the surrender value. Don't let the 'apparent' loss on a nominal value stop you moving providers - however check if the contract has a bonus that is payable on maturity (often up to 5% extra units) - this may be valuable.
 
Hello all
Many thanks for all the replies - there's some very interesting items in there that I'd never realised could impact so significantly - esp. the Initiator/Accumulator units issue.

To answer some of the above, and ask a few more questions:

(1) I'm as amazed as Clubman as to why Surrender and Nominal values were never stated before this year. Is likely explanation the fact that the Life companies think people will have serious concerns when they see this in black-and-white?

e.g. - when I look at my nominal value, I think everythings OK, I can see where I was charged, and that those charges were in line with mgt charges etc., I can see my allocation rates, I can see the funds' growth that the money was invested in, and IMPORTANTLY I can see how the value gets arrived at - so it's fairly transparent. And I can see that my nominal value is ahead of my contributions, which makes me happy :)

BUT, when I look at my "Surrender" value, I see that my value is:

"Current value at XX, Month, 2005 €ZZZ,zzz"
Represented by:
Fund
CL/BIAM PenMgd- Accumulator - M,mmm units secured @ bid price €AA,aaa - nom value =€XX,XXX
CL/BIAM PenMgd- Initial - N,nnn units secured @ bid price € B,bbb - .............nom value =€YY,yyy
--------------------------------------------------------------------------------------------
.......................................................................................................................€ZZZ,zzz

................................................................................................Surrender Value €Ww,www"

And, in particular, my Surr value is less than my contributions! which makes me sad :(

In the above,

M,mmm is about half N,nnn
A,aaa is about three times B,bbb
X,xxx is about 1.5 times YY,yyy
Ww,www is about 73% of ZZZ,zzz (or 23% of a "loss")

Do the various ratios above explain, therefore, the 23% "loss"?

(2) Does the Surrender Value tend toward the Nominal Value as you approach Normal Retirement Age? e.g does the "apparant loss" actually diminish as you get closer to your Normal Retirement Age (assumed at 60 in my case?)

(3) What happens if you retire early - do you have to stomach the "surrender value" at that stage (e.g. you retire at 50, or 53, or 55 or whatever, instead of the assumed 60)?

(4) is this fairly typical of pension schemes? for example with Quinn Life Freeway (which is mentioned as quite a good fund) do they have the same idea, or is it a lot clearer with no funny business about Nominal and Surrender value ? Should I just make the min. contributions to CL (there a investment bonus in yr 10 - "at the end of the 10th Membership yr the number of units allocated in respect of Normal Contribs shall be increased by 5%" - there are also other investment bonuses subsequntly, but they appear to be all contingent on the fact that Normal Contributions are continued.



Thanks for all your help and all the informed posts on this to date
 
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