Huge Drop in Defined Benefit Transfer Value

Robzig said:
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
Click to expand...
Yes, you are right. As Isaac Newton so astutely observed, apples fall off trees not because if I drop a stone it falls to earth but because they both fall due to gravity. Still, annuity rates are a good (inverse) proxy for TVs.
 
This exchange got me thinking. To some extent it defeats the purpose by checking regularly on your TV from a DB scheme. One of the big advantages of DB is that you don’t have to worry about volatile market values.
Makes me think I was right to have a ‘no TVs’ rule with my smoothed AE proposal.
 
My understanding is that it's just less!:)

My understanding is that there's usually a 10% plus difference between the TV at the point of retirement (i.e. where 100% of the MVA has been captured) and the equivalent annuity cost. I'm talking about 100% of the statutory TV.

This sort of differential makes sense given the need to account for the insurer's margin and expenses, the adviser's commission, etc,?
 
Typically, Transfer values increase by around 8% to 12%pa in the years leading up to retirement.

However, last year bond yields shot up faster than at anytime in modern history and bond prices dropped by a very significant margin of the order of 15% for a global bond fund hedged to Euro.

This means that transfer values which are linked to bond yields have taken a hit but annuity rates have increased by a commensurate amount leading to a no gain no loss situation for anyone intending to purchase an income in retirement.
 
Last edited:
Maybe find how what the bond component of your pension is. if it is very high that explains the fall in value? All pensions have been hit by falling bond values as interest rates rise. Paradoxically the "lowest risk" pensions have been hit much harder than "high risk" pension portfolios because they had too many low interest rate bonds in comparison to equities. There should be a ban on calling pensions "low risk" if they are loaded up with bonds
 
Duke of Marmalade said:
TVs have nothing to do with the make up of your pension fund. They are set by a statutory formula.
Click to expand...
So why is the transfer value of the pension falling then surely it is because the value of the pension fund itself is falling and that is dependant on what assets are held by the fund. Its well known that pension funds are falling because of falling bond values as a result of rising interest rates.
 
joe sod said:
So why is the transfer value of the pension falling then surely it is because the value of the pension fund itself is falling and that is dependant on what assets are held by the fund. Its well known that pension funds are falling because of falling bond values as a result of rising interest rates.
Click to expand...
No, it's a formula; see post #17. Yes, the formula reflects the fact that in general pension funds are falling in value but it has nothing to do with the make-up of your particular pension fund; it may even have risen in value!
 
Duke of Marmalade said:
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.
Click to expand...
To answer the above questions: 1) any increases of my pension in the course of payment are discretionary 2) dependents pension of 2/3rds and 3) my health is excellent.

Not sure what you mean by "free" advice. I haven't sought any financial advice on this yet. The big decision is whether to take a TV or go with the defined pension. As I indicated in my original post, the huge reduction in TV (which is likely to go lower if I'm interpreting the replies above) has probably made that decision for me. I was looking at a TV from the point of view of leaving any residual ARF funds to my adult children on my passing. Given the figures, I don't think that's a realistic option now.
 
AChara said:
To answer the above questions: 1) any increases of my pension in the course of payment are discretionary 2) dependents pension of 2/3rds and 3) my health is excellent.

Not sure what you mean by "free" advice. I haven't sought any financial advice on this yet. The big decision is whether to take a TV or go with the defined pension. As I indicated in my original post, the huge reduction in TV (which is likely to go lower if I'm interpreting the replies above) has probably made that decision for me. I was looking at a TV from the point of view of leaving any residual ARF funds to my adult children on my passing. Given the figures, I don't think that's a realistic option now.
Click to expand...
All three answers point to bad value in that TV.
On "free advice" I was thinking of a situation I met where the employer was offering enhanced TVs as they wanted the deferred pensioners to take the TV. The employer paid for the deferred members to have financial advice in that situation. You are in a different place. My own thoughts are that, unless there are other complications, you have already enough information from this site to make an informed call. Maybe others will disagree.
 
There point here is that the transfer value is irrelevant to the member who is close to retirement
 
McGaggs said:
There point here is that the transfer value is irrelevant to the member who is close to retirement
Click to expand...
I don’t understand this point at all.

If I was going to take a transfer from a DB pension surely the best time to take it is when the transfer value is at its highest and, all things being equal they will be as close to retirement as possible?
 
If someone was intending to take the TV, they should have been monitoring it and taking it when bond yields were extremely low. If they are still in the employment to which the scheme relates, they can't make the choice till their retirement age so all they have done is upset themselves at the unachievable earlier TV.
 
McGaggs said:
If someone was intending to take the TV, they should have been monitoring it and taking it when bond yields were extremely low. If they are still in the employment to which the scheme relates, they can't make the choice till their retirement age so all they have done is upset themselves at the unachievable earlier TV.
Click to expand...
My understanding is that if you are still in employment you can never take a TV. It only applies to deferred members.
 
Actually, the statutory tight to a transfer value only exists for the first 2 years after leaving service. Beyond that it depends on the rules of the scheme. Admittedly, such a restriction is rare enough but it is possible that you could find yourself in an @ColmFagan style "no transfer" zone!
 
McGaggs said:
If someone was intending to take the TV, they should have been monitoring it and taking it when bond yields were extremely low. If they are still in the employment to which the scheme relates, they can't make the choice till their retirement age so all they have done is upset themselves at the unachievable earlier TV.
Click to expand...
I didn't have enough knowledge to understand that as interest rates take off, TV values plummet. It's only in the last few months that I came across a few articles suggesting this. Unfortunately I acquired this info too late. It's probably fair to suggest that not too many outside of pension experts would have foreseen situations like mine unfolding.
I notice that a poster above who replied to this thread asked that very question on this discussion board in January 2022 and didn't get a single reply to his query let alone any suggestion that perhaps early 2022 might have been an optimum time to take a TV.

1683719588117.png
 
AChara said:
I didn't have enough knowledge to understand that as interest rates take off, TV values plummet. It's only in the last few months that I came across a few articles suggesting this. Unfortunately I acquired this info too late. It's probably fair to suggest that not too many outside of pension experts would have foreseen situations like mine unfolding.
I notice that a poster above who replied to this thread asked that very question on this discussion board in January 2022 and didn't get a single reply to his query let alone any suggestion that perhaps early 2022 might have been an optimum time to take a TV.

View attachment 7481
Click to expand...
Unfortunately the financial guys are never explicit, they talk about rising bond yields but never say falling bond values, the same thing effectively. its only now after the fact that they mention this. It is one of the worst industries for camouflaging relatively simple concepts in complicated jargon to confuse the average guy.
 
joe sod said:
Unfortunately the financial guys are never explicit, they talk about rising bond yields but never say falling bond values, the same thing effectively. its only now after the fact that they mention this. It is one of the worst industries for camouflaging relatively simple concepts in complicated jargon to confuse the average guy.
Click to expand...
Thank you for articulating a thought that’s long been fermenting in my head. As an employee representative pension trustee for many years in my last job I was regularly bewildered by the many moving parts and alternatives. It was very easy to find myself giving up and saying to someone else “ can you sort it out?” However as I had (and have) skin in the game I applied myself to learning as much about pensions as I could and now feel better able to make my own decisions without paying for financial advice, at least for the basics.

I expect I will have to pay someone to facilitate my (and my wife’s) eventual (actually quite imminent) retirement solutions but hopefully my knowledge to date will help keep any such costs a bit lower than they might have been.
 
Duke of Marmalade said:
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.
Click to expand...
Great information.
Is it possible to view average annuity rates or are they guarded ?
 
You must log in or register to reply here.
Back
Top