Enhanced Transfer Values (ETV’s) 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.
Our team specialises in helping clients through the Enhanced Transfer Value (ETV) process and has experience with some of Ireland’s largest db schemes including Diageo, Bausch & Lomb and Cadbury to name a few.
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.
There are several benefits for a deferred member considering taking an Enhanced Transferred Value such as: –
- You may be eligible to access your benefits from age 50.
- Transferring into a policy in your own name will give you full control over investment decisions.
- Potentially receiving a higher tax-free lump sum.
- Transferring your benefits from the scheme removes any risk associated with the original Defined Benefit Pension scheme winding up in a deficit or benefits been reduced.
- Accepting an Enhanced Transfer Value may be suitable due to your particular circumstances such as health, financial, and so on.
However, albeit the above options may be tempting, we must stress the importance of seeking impartial advice.
Furthermore, Defined Benefit pensions can be quite complex, so it is imperative you understand its structure and your available options. There is no one-size-fits-all when it comes to these matters.
Your overall financial circumstances may be different from a friend you spoke with who was in a similar scheme.
A good place to start would be requesting your Annual Benefit Statement. This will include details of your entitlements accrued and your projected benefits. Due to the technical jargon, it would be a good idea to have someone qualified to help you go through it.
Another recommendation would be to request a copy of the Trustee annual report. Once you receive it ,look at the current member split and funding position. Furthermore, if the scheme is in a deficit, ask are there plans in place to address this matter.
Again, this can be a tricky landscape to navigate. Find yourself someone that will give impartial advice and take a holistic view of your situation. Once you have done this you are able to begin making decisions.
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?
Depending on your employment situation, you will probably have different options available. If you are a deferred member, you may have the option of transferring to your current employer’s Defined Contribution scheme.
However, you should note if you take this course of action the investment risk concerning the pension fund will pass from your former employer to you personally.
If you do transfer to a Defined Contribution arrangement, it will give you certain options at retirement. Whereas Defined Benefit schemes offer the option of an annual pension and, or a lump sum at retirement, DC schemes are different.
The Defined Benefit scheme lump sums are calculated by a formula relating to your final salary along with years of service.
Whereas Defined Contribution schemes often offer members a 25% tax-free lump sum of their accumulated pension pot at retirement. From here you may ringfence the first €63,500 into an Approved Minimum Retirement Fund (AMRF) and invest the remainder in an Approved Retirement Fund (ARF).
This will allow you control over your investment decision going forward. However, it is worth noting the risk you outlive your AMRF should you draw the funds too quickly. Again, it will come down to personal preference and circumstances.
Some may like the stability of a Defined Benefit arrangement with a set yearly income. Others may enjoy the flexibility of transferring and having control over your investment decisions.
How do I speak to an advisor to assess my options?
There is no universal answer that can be given when it comes to Enhanced Transfer Values. You should take a holistic view of your situation.
Take time to weigh up the pros and cons of each decision. One may look attractive at the outset but after a little digging, you might find a better alternative.
The pension world is full of jargon and acronyms. I tried to avoid them in this article, but you will see DC, DB, PRB, BOB, and many others are thrown around. Do not be overwhelmed and once you find the right advisor, they will be more than happy to break everything down for you.
The easiest way to begin assessing your options is by contacting our team.
Our advisors are industry experts and will only allow you to transfer if it is the right decision for your situation. A holistic approach must be taken when discussing such decisions.
If you would like a free no-obligation chat please leave your information in the contact box or give us a call.
|Phone||01 890 3518|
|In-Person Meeting||Contact Our Team|
Need more information?
We send out a short email every Thursday with some tips and information we think may be useful.
Join over 2,000 subscribers who enjoy our weekly tips!
Book Your Free Consultation Today
*This blog should be used for information only and not taken as financial advice.