Occupational Pensioners’ Alliance
Written Submission in response to:
APPROACHES TO THE CALCULATION OF PENSIONS TRANSFER VALUES
Consultation on Draft Regulations
August 2007
Introduction
1. The Occupational Pensioners’ Alliance (OPA) (http://www.opalliance.org.uk/) comprises of forty member associations nationally. Each member association focuses the views of the members of schemes for their company. An elected Council focuses the views from the associations. In aggregate, more than 2 million scheme members are represented in this way.
2. We welcome the opportunity to comment on the Draft Regulations for the Calculation of Cash Equivalent Transfer Values.
3. The OPA made a response to the DWP Consultation in August 2006 and a copy is attached. We are disappointed that the Government chose not to accept that the EXD54 should be the basis of the amended Regulations despite the recommendation from the Actuarial Profession.
4. We accept that it is the Government’s intention to move to principles based regulation and away from prescription. However we urge caution in this approach. The Regulations in place now were aimed at tackling a perceived problem at the time. Unless and until the original problem has been addressed or ameliorated then prescription should remain in place.
5. The OPA areas of concern are:
The use of phrases such as
· "Any long term savings may be set against the immediate costs",
· "it would be good practice for schemes to provide this information on request", "the trustees shall determine the extent to which any discretionary benefits shall be taken into account.",
· " the Government would expect that...",
· "the actuary ought to bring that matter to the attention of the trustees",
leads to the possibility and in some cases the probability that the Regulations can be ignored for administrative reasons.
6. Members of schemes understandably prefer prescription as they have a yardstick against which to judge the actions of trustees. On the other hand administrators prefer less prescription as it complicates their job in terms of compliance and employers will seek always to minimise the scheme liabilities and costs.
7. The Draft Regulations signally lack any means for members to seek redress if they believe their CETV has been incorrectly calculated. First there is no duty on the trustees to inform the member of the assumptions made in the calculations. Second the assumptions have to be made on a "best estimate" basis. But, suppose the assumptions used could not reasonably be said to be "best estimate" - who can tell? Since the member has no right to know what assumptions were made, he or she is powerless. Suppose the calculation was simply a miscalculationstarting fromreasonable assumptions - who can tell?
8. Note that this is different from the circumstance of a maladministered pension - in general the scheme member can (from the deeds) know enough to make an informed judgment about a maladministered pension.
9. A balance has to be struck and we make some suggestions below where the interests of members can be considered more than at present.
Comments on the Draft Regulations
10. The Minimum Amount for a CETV is an important principle. However what is more important are the assumptions used in the calculation of the Minimum. Under the Regulations two similar schemes will be able to calculate different CETVs for members whose service and benefits etc are broadly similar, based only on the assumptions made by the trustees. This is unfair.
11. We welcome the intention to exclude the employer from having to agree the assumptions. However the OPA is concerned that too many schemes have a majority of employer appointed trustees on their boards. This will inevitably lead to the conclusion that the assumptions will always favour a smaller rather than a larger CETV and so act in favour of the employer to the detriment of the scheme member. This will affect the member’s pension for the rest of their life. The proposals to increase the Member Nominated Trustee representation to 50per cent will help in addressing this thorny issue. The addition of an independent Chairman would ensure fairness in the event of disagreement.
12. Regulation 3 allows for the extension of time to make a statement of entitlement due to circumstances beyond the control of the trustees. The OPA believes that it is important for the member to be informed if this is to happen and recommend the following amendment to page 2 paragraph 3 item (1)(b) as follows
after the words “reasonable require” at the end of paragraph (b) add
“subject to the member being informed of the extension as soon as the trustees become aware of the need to extend”
13. New Regulation 7B does not allow for the member to be informed of the basis of the assumptions used. The OPA does not accept that additional burdens will be placed on schemes if they have to inform the member. Presumably the trustees have to document the assumptions used and so there should be no extra cost. We recommend an amendment to page 4 New Regulation 7B - add new para (4) and renumber (5) to (6)
New para (4) to read
“(4) The trustees shall provide to the member upon request in writing details of the assumptions used in calculating the cash equivalent.”
14. This addition will give members more confidence in being able to understand how their cash equivalents are calculated. We accept that the explanation may be complex and involve actuarial language, but this information is vital to demonstrate transparency and fairness in the CETV process. As drafted the Regulations are too secretive and too wooly allowing too much discretion to the trustees.
15. We note that Schedule 1A allows for reduction in the initial cash equivalent if there is an insufficiency report in force. The OPA believes strongly that this is unfair since a member who retires from a scheme in deficit will receive a full, unreduced pension whilst the cash equivalent of another member who leaves the scheme at the same time will be reduced. This is discrimination. Furthermore a member may leave a scheme, which soon after enters the PPF. Had they remained in the scheme they would have received compensation at PPF levels. The OPA believes that if there is to be a reduction in the initial cash equivalent to take account of scheme deficits then this reduction should be limited to produce a cash equivalent no less that an amount which would provide the PPF equivalent compensation. We recommend the following amendment to Schedule 1A:
Insert a new paragraph 7 and renumber from there
“7. If the trustees reduce any part of the member’s initial cash equivalent, the reduction shall not reduce the cash equivalent to less than the amount required to provide the equivalent PPF compensation.”
16. Paragraph 18 of Schedule 1A allows for the trustees to take account of savings in administration costs, but at their discretion. The OPA believes that this will rarely happen yet the reductions allowed in paragraphs 4, 5 and 6 will always be applied if there is an insufficiency report in force. The OPA believe that is too much in favour of the employer and to redress the balance and achieve fairness the following amendment should be made:
Insert new paragraph 19 and renumber appropriately
19. Where the trustees have reduced the initial cash equivalent by virtue of paragraphs 4, 5 and 6 and the trustees have identified administrative cost savings, the initial cash equivalent resulting from the reductions shall be adjusted to reflect these savings.”
Contact Details
Roger Turner
Executive Officer
Occupational Pensioners’ Alliance
42-44 West Street
Dunstable
Beds
LU6 1TA
Telephone 01582 663880
Occupational Pensioners’ Alliance
Written Response to
APPROACHES TO
THE CALCULATION OF PENSIONS
TRANSFER VALUES
August 2006
Approaches to the Calculation of Pensions Transfer Values
Introduction
1. The Occupational Pensioners’ Alliance (OPA) comprises members from 40 occupational pensioner organisations nationwide and represents the interests of over two million pensioners
2. The OPA welcomes the opportunity to comment on the “Approaches to the calculation of pensions transfer values” consultation document.
3. Contact Details
Roger Turner
Executive Officer
Occupational Pensioners’ Alliance
42-44 West Street
Dunstable
Beds
LU6 1TA
Telephone 01582 663880
General Comments
3. The Pensions Minister, James Purnell, said in a speech to the IPPR on 12th July that “The three Cs: Confidence, Complexity and Culture” are main factors in causing some of the difficulties faced by pensioners and workers today. The OPA suggest that the three C’s should be part of the consideration in deciding how to calculate transfer values.
4. From a transferring member’s point of view, there should be confidence that the transfer value fairly reflects the value of his benefits, and the way in which the value is calculated should be easily understood. This will lead to a culture of trust in the system.
5. The simplest and fairest arrangement for acash equivalent transfer value(CETV) is that the amount should be the same as that required to buy the entitlement. There is no unfairness to the remaining scheme members - what the company (via the trust) is required to deliver to them remains the same. The OPA believes it would be fair to require companies to close the loopholethat allowsthem to save money by having miserly transfer values, just as it was fair to close the loophole provided by a miserly MFR and windup regulations **(Paragraph 3.19). Any difficulties with underfunded schemes would be transient, in view of the powers the Regulator now has.
6. The OPA therefore agrees with the terms of Para 6 page 6:
“In GN11 to date it has generally been interpreted to mean that the transfer value calculated under GN11 is a cash value that must fairly reflect the deferred benefits of members which they are entitled to under the transferring scheme and which would be given up on transfer.”
7. The problem is that, as stated in Para 6 Page 6:
“This permits transfer values to be assessed having regard to the market rates of return on equities, gilts or other assets as appropriate. This can result in a wide variation in transfer values depending on the chosen asset class and assumed rate of return used to discount future pension payments.”
8. The result being that two people with identical service in two separate company schemes with similar benefits can have very different transfer values. This does not instil confidence in the system, is complex and adds to the culture of mistrust.
9. The OPA welcomes the Government’s intention to review the system of calculating transfer values and would like to see an approach adopted similar to that proposed by the Actuarial Profession in EXD54.
10. We agree with the Actuarial Profession Ministerial Briefing Note: Actuarial Guidance on Transfer Values (GN11) – October 2005.
All schemes should disclose on request to the member the unreduced GN11 transfer value. Individual members of pension schemes do not have a good understanding of the worth of their pension benefits and the cost of providing them.
In particular, the OPA agrees that the Government’s initiatives to encourage levels of private saving and decrease the reliance on the State will not be helped if GN11 provides a calculation of pension value that understates both its true worth and the cost of replicating a pension of similar amount. Instead, such an understatement is likely to affect one of the Government’s key target audiences under these initiatives – younger members with short periods of pensionable service.
It is also likely to impact on women, in pension valuations on divorce, as it is women who generally have the larger claim on the pension assets earning by the divorcing couple.
Responses to the Consultation Questions
Question 1. Are there any other key stakeholders whose interests need to be addressed?
Answer:
11. Everyone is a stakeholder in these decisions because whether the government willgive weightto the consumers of occupational pensions, or give weight to those who are providers of occupational pensions, is a concern for all those who have or might have a pension.
Question 2. What is your view about the legal rights of a member wanting to transfer out of a pension scheme?
Answer:
12. "Striking a balance" is a false premise. The entitlements of the remaining members are not altered by the CETV calculation method. The OPA agrees entirely with the member view of CETV as expressed in paragraph 5.6 in the Actuarial Profession document “making financial sense of the future”.
13. Members’ legal rights should be fair and clear. Members have entered into a contract with the employer which defines clearly the pension rights accrued at any particular time. Therefore the costs of those rights should be met in full at the time of departure, whether in transferring out or in receiving a pension. The strength of the employer’s covenant is not used to determine the amount of pension payable to a member at the scheme’s pension age. An employee’s pension is not reduced on first receipt if the scheme has a deficit. Furthermore the scheme has an ongoing liability for the pension increases and longevity etc. Why should it be accepted therefore that a transferee out with similar accrued rights to a new pensioner should be penalised?
14. The Human Rights Act 1998 is clear in that:
“Every natural or legal person is entitled to peaceful enjoyment of his possessions.”
15. Any calculation must not therefore deprive a member of his possession in all or in part.
Question 3. Your views are sought on whether it would be reasonable to have a separate set of assumptions for the calculation of transfer values, and if so, the principles underpinning the choice of those assumptions.
Answer:
16. There are some actuarial assumptions, eg about inflation or longevity, where it would be manifestly unfair for the trustees to be allowed to use one set of values forscheme specific funding and a different set when they wanted to lower transfer values. For questions of risk/prudence the EXD54 approach is logical. Since the cost of providing pensions is similar to the interest payments on bond investments, it is reasonable to expect transfer values to be calculated using a bond-based discount rate.