Enhanced Transfer Values are a hot topic at the moment. Perhaps due to a combination of Defined Benefit schemes coming under scrutiny and some companies offering Enhanced Transfer Values to deferred members.
Whilst Enhanced Transfer Values can be offered to both active and deferred members, this article is targeted towards deferred members and their potential options.
We will explain what exactly an Enhanced Transfer Value and a deferred member are later. However, we will note off the bat, if you have been offered an Enhanced Transfer Value, it is important to seek assistance from a Qualified Financial Advisor.
We aim to reference and provide some information for you in easy-to-understand layman’s terms so you may better understand your situation.
This blog will not inform you whether you should or should not take an Enhanced Transfer Value but hopefully, it will give you more clarity going forward.
As a result, the logical place to start would be explaining what an Enhanced Transfer Value is.
What is an Enhanced Transfer Value?
An Enhanced Transfer Value (ETV) is an exercise where members are offered a once-off opportunity to transfer the value of their pension, on enhanced terms to another arrangement while simultaneously allowing the company and trustees to de-risk the pension scheme.
A 2016 study by the Pensions Authority illustrated how 666 defined benefit schemes in Ireland had total liabilities of €58.1 billion.
These liabilities are increasing pressure on companies and trustees running the schemes leading to many offering an Enhanced Transfer Value.
Due to many Defined Benefit (DB) schemes currently having large liabilities, deferred members have been offered Enhanced Transfer Values.
Who are Deferred Members?
Deferred members are those who are past members of an occupational pension scheme that have not yet reached retirement. Perhaps you were part of a Defined Benefit scheme in a previous workplace. As a deferred member, you have the option of leaving the deferred benefits until retirement or transferring out to a policy in your own name.
Even as a deferred member of a Defined Benefit pension scheme, you will still be entitled to your pension once you reach retirement. This will give you an income for the rest of your life and is seen as lucrative by many.
Therefore, you should not jump into any decisions when it comes to potentially transferring out of a Defined Benefit pension scheme. Enlist the help of an experienced professional who can weigh up all potential options.
We all have a different set of circumstances and such a decision should not be rushed.
Risks associated with remaining in a DB scheme as a deferred member
- The scheme trustees may reduce the deferred pension before you reach retirement age.
- It is a possibility the scheme could wind up with a deficit either before or after your retirement age.
- Trustees could potentially reduce pension due to be paid after retirement age.
Hence, keep in mind that a Defined Benefit pension is a promise, not a guarantee.
Due to the above, proper planning is essential when it comes to your Defined Benefit arrangement. As a result, having a full financial plan in place that incorporates both pension benefits along with any other income sources is vital.
Benefits of a Deferred Member Transferring from a DB Scheme.
How are Enhanced Transfer Values Calculated?
Sometimes Trustees of Defined Benefit schemes will allow members to take a transfer from the scheme. We now know this applies to both:
- Current employees where schemes have ceased to accrue future service benefits,
- Deferred members
In some cases, current employees may have the option of transferring to their employer’s DC arrangement. Alternatively, deferred members may have the option to transfer to a different pension arrangement. For example, a Personal Retirement Bond (PRB).
Transfer values are normally calculated on the basis underlying the Funding Standard and this basis is not considered to offer members, especially younger members enough value. Therefore, to make an offer more attractive to members, it may be necessary to offer an Enhanced Transfer Value.
These calculations are done by an actuary on a system called ASP PEN-2.
Why do Company’s Offer Enhanced Transfer Values?
In short, to reduce liabilities. If a member accepts an Enhanced Transfer Value, their liabilities are removed from the scheme. Due to this fact, they no longer have the promise you of paying a certain amount in retirement until you pass away.
Therefore, this reduces both the size of the scheme’s liabilities and the risk associated with this. Enhanced Transfer Values can also offer sizeable savings when it comes to the companies accounting reserves.
By offering an Enhanced Transfer Value to a member it also:
- Removes all future scheme pension risks associated with that member.
- Reduces accounting funding volatility.
- Reduces the scheme’s long-term operating costs.
- Demonstrates to key stakeholders that pension risk is being managed.
In simple terms, it will save the company money in the long-term by offering you an enhanced value in return for transferring out of the scheme.
What Are The Options if Transferring?
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*This blog should be used for information only and not taken as financial advice.