a fall in Bond Yields (the thing that schemes calculate their
liabilities on, amongst other factors) there comes typically an increase
in the deficit for DB schemes, the gap between their assets and
for you this doesnâ€™t normally mean a great deal but for the
Trustees and sponsors of DB schemes this is a continual â€œstress pointâ€,
it often means that recovery plans need to be re-evaluated and if
nothing else it prompts the
investment advisory and actuarial communities into a flurry of activity
to try to get in front of their clients and â€œsellâ€ their services or at
least to hike up the billable hours tally! And the financial press
expends hours and hours commenting on this every time and quite frankly,
I personally couldn't care that much as what they say is often
irrelavent and has no real benefit to those that matter, pension scheme
members and their families (remember these Trustees? You are supposed to
work for them!)
it also often means that anyone with a Cash Equivalent Transfer Value
(CETV) could see an increase in this value, possibly prompting a flurry
of IFA activity in the potential Pension Transfer market as lots of members start to think about Â£Â£Â£Â£Â£Â£Â£Â£
Thanks to the Pension Regulator (tPR) there are five ways to value a DB schemeâ€™s liabilities, all of them different.
Statutory Funding Objective (SFO) *
Section 179 (Commonly referred to as the PPF Buy Out)
The Self Sufficiency Measure
The Insurance Buy Out *
The Accounting Valuation
And depending upon which one you look at can colour your sombre mood about your host pension scheme and your benefits within.
Now the two that I have marked with * are the two that I feel are most use to us non-actuary, non ACCA types, they are the two that tell us the â€œhealthâ€ of our scheme, the other three are in my opinion irrelevant to most of us (Sec 179 is if the scheme had to go into the PPF and that is not something we should be looking at frankly, the Self Sufficiency Measure is really only for the sponsor and trustees to care about and I have no interest in how the sponsor shows the scheme in their accounts, the Accounting Valuation or IAS19)
So as a deferred, active or retired member (or rather your client) what does any of this mean to you or them and why should you care?
This used to be called â€œTechnical Provisionsâ€ or â€œThe On-going Basisâ€ and is essentially and in my â€œspeakâ€ the income/expenses planner that many of us (me included) use. How much is expected to come in and what â€œbillsâ€ we have coming up, so that we can budget effectively.
This tells you how much the scheme has to do to make up what is needed versus what it has and this gives us the â€œDeficitâ€ this is the shortfall and is often made up through extra payments, contingent assets and the crossing of many fingers!
the deficit is nil or really small and is that over an extended period
then chances are the scheme is being run pretty well all things
considered. If the defecit goes up and down like the Blackpool Rollercoaster then chances are it's not coping well!
The Insurance Buy Out
This is, in my opinion, the other really relevant measure of a schemeâ€™s health.
If it had to secure every single benefit (except usually DIS lump sums) right now with guaranteed annuities from a Life Company, how much are they short?
If they are close to 100% and are so over a period of time then again, Iâ€™d say theyâ€™re doing a pretty good job of running the scheme!
But what does this mean in the real world?
It means that if you have a deferred pension sitting in a DB scheme somewhere, you shouldnâ€™t be worried by this change in Gilt Yields, they happen regularly and can go up or down, it doesnâ€™t mean that your benefits change, they donâ€™t as a result, only the cost to your sponsoring employer of providing them and frankly thatâ€™s for them to worry about not you!
But if you are an IFA it can mean that some clients may be more interested in looking at what they could do with such a pension CETV and this is an opportunity to give real, stand-alone advice on a very important and potentially highly beneficial area of pension planning.
In short, ask your clients if they have a DB pension, never be afraid to explore this subject with them, as if you donâ€™t someone else mayâ€¦.
If they do, ask them if they understand how it works and what they will get....
If they don't this is a chance to do some actual good, you can advise they get a CETV, not for the purpose of transferring, no no no. But for the single purpose of understanding what they have and how the damned thing actually works! After all many routinely recommend a client gets a BR19 (I see it in so many reports) but I rarely, if ever see advice to get a CETV.
You don't need to have transfer permissions to do this or even to help the client understand what their DB scheme offers, you just have to be able to read and speak (Sorry but it really is that easy in my opinion) And what you will potentially gain is......respect, kudos, peace of mind, a fee for possible advice (not selling a product but selling advice - I know right? Radical concept!)
If you don't and someone else does then guess what? You risk losing the client.....
Simple then right?
Ask every client if they have a DB scheme and if so that they fully uunderstand it, if not telll them to get a CETV and you will summarise the salient points for them and leave it at that.
You may be surprised to learn that this can generate business and goodwill by NOT approaching the issue wanting to transfer it out, try it on for size, give a client some honest to goodness advice that requires no sale! You may find that it has a positive effect and that it can generate extra business and maybe not even in the DB pension area......
This is Niel, signing off!