UK Final Salary Pension Offers Reach Record High

We have seen offers from companies reach record highs for their members so had a chat with a specialist to understand what is behind this increase and let you know how you can take advantage of this.

A Cash Equivalent Transfer Value (CETV) is a sum offered by a pension company, to its member, in exchange of their final salary pension scheme (or defined benefit scheme). It is calculated by their actuaries according to several factors which primarily, or historically, have mainly been based on the value of the members pension and the years that it must be paid out for.

The actuarial standard, through the years has been in the rage of 15 to 20 times the value of the pension. For example, if you had a final salary of GBP 5,000, you might expect an offer of GBP 75,000 to 100,000.

At present, these offers have reached an all time high and in some cases are being increased to 40 to 50 times the value of the final salary and in some cases even higher.

We spoke with an associate of ours that works as a specialist pension technician to understand the reason behind the sudden surge in values and perhaps also determine if this trend will continue and if so, for how long.

Loadstone: Simon, thanks for your time today. As we explained prior to this conversation, we are seeing some seriously high offers come out from pension companies at present. Is this just us or is it market wide?

Simon: It’s actually market wide. We too have been seeing values of up to 40 times and above.

Loadstone: This isn't a small increase though. This is pretty significant! What is causing such an increase in these offers?

Simon: It is most likely part of a de-risking exercise for the pension companies to reduce liabilities by offering certain members enhanced CETVs.

Loadstone: Can you explain that in further detail?

Simon: Sure. At present, 79% of UK defined benefit schemes continue in on-going and mostly increasing deficit. About 60% of that 79% have no hope of recovery and the majority are now closed to new members with an increasing number also closed to future accrual for active members (meaning they will not increase in value any further).

Loadstone: So they have this large deficit and offering increased CETVs is their way of reducing it? Surely that would increase the amount owed.

Simon: Well at present, a lot of firms have cash available on their balance sheet. The markets have enjoyed a very long bull run and whilst they have the cash available they want to do what they can to reduce these deficits.

Loadstone: And closing the schemes to future accruals is another way to reduce the deficit?

Simon: To an extent. It limits the rate at which the deficit may grow by but it wont reduce it. Another popular method is to change the retirement age of the member to a later date.

Loadstone: And how long do you think that this could go on for?

Simon: It’s hard to say. My guess, and I emphasize guess is that it will continue for as long as the companies are performing well in this bull market.

Loadstone: So a bear market or recession would see them reduce?

Simon: Most certainly. Imagine that you had a credit card debt or loan. When you have cash available, you may use that opportunity to reduce your debts. If your income dries up then you need that cash for other commitments. If we entered into a recession then these CETVs would reduce significantly and most likely we would see the companies trying dissuade members from transferring their pensions or adding extra hurdles in their process to make things harder for the member to get their pension out.

Loadstone: What advice would you offer to anyone with defined benefit scheme?

Simon: Well I would certainly advise them to obtain a CETV offer as they are entitled to receive one annually for free and there is no commitment in actually going through with a transfer. Then if the offer is reasonable and makes sense, to accept it while there is money available from the scheme.

Loadstone: Which are some of the worst deficits at the moment?

Simon: There are so many in serious jeopardy at the moment. I would say some of the leading deficits are BAE Systems, BA, BT, Barclays, BP, Centrica, Diageo, G4S, GKN, ITV, Lloyds Banking, National Grid, Rio Tinto, Rolls-Royce, Sainsbury, Severn Trent, Standard Chartered, Tesco, Taylor Wimpey, Vodafone, Whitbread…

Loadstone: You’re listing quite a few. Can you give us an example of the extent of the deficits with some of these companies?

Simon: Well, nine out of the FTSE 100 companies have pension deficits that are greater than their actual equity market value.

Loadstone: That’s pretty scary.

Simon: Yes, many people don't realize the severity of the situation and it is only going to get worse.

Loadstone: Thank you for your time today Simon.

If you have a defined benefit scheme then we can obtain a CETV for you on your behalf. Once we receive the offer from your pension company, we will put together a free report of advice for you to understand your options better and most importantly, show you how you can receive the cash offer into a personal trust which will be treated as a secure private pension, safe from any ceding schemes.

To get your CETV offer and free report, kindly email info@loadstonegroup.com or complete the contact form on our website at www.loadstonegroup.com