Defined Benefit Buyout Valuation

[NotoriousCanary]

I've seen a number of financial journalists saying that there are some good offers to buy out Defined Benefit pensions at the moment. I think this is because returns on gilts are at a historical low, so that it is more expensive for pension funds to finance DB.

I know the government values a DB pension at 20x the annual benefit (so I'm taking that as approximating fair value).

So what constitutes a good buy-out price for a DB pensions (25x, 30x, 40x)?

..NC

[NotoriousCanary]

Thanks for that info.

So I'm guessing that a 40x valuation would be at the top end of any reasonable expectations?

And, yes, the question was prompted by an independent financial adviser seemingly unable to give any indication about what might be a bad/fair/good multiple for a buy-out, or give any methodology for calculating/assessing the risks and rewards for the buy-out.

..NC

[mearnsfool]

Was the advisor refusing to give you the information because you were trying to get a freebie calculation off the advisor or were they refusing to do a valuation if you paid them for fear of the liabilities that they could suffer.

[Alaric]

And, yes, the question was prompted by an independent financial adviser seemingly unable to give any indication about what might be a bad/fair/good multiple for a buy-out, or give any methodology for calculating/assessing the risks and rewards for the buy-out.

There are some DB schemes who would be prepared to make an offer to all the scheme members for complete closure. That is, offer a sum of money to compensate for the withdrawal of the guarantees. The general reasoning approach to such an offer is to assume investment of the offer in a portfolio of assets and establish the running yield and likely increases if the relative value of dividends and interest declines with price increases, inflation in other words.

It's easier to benchmark, the closer you are to retirement or early retirement.

[NotoriousCanary]

Was the advisor refusing to give you the information because you were trying to get a freebie calculation off the advisor or were they refusing to do a valuation if you paid them for fear of the liabilities that they could suffer.

I guess you know that you need to pay an IFC to evaluate any pension switch proposal, and this opens them to potential liabilities if they give you incorrect advice. So there is absolutely no chance of a freebie.

Before I committed to paying, I was trying to get some broad parameters to see if a potential transfer was worth evaluating. Bear in mind that fees are 1%+ of the pension fund, so that is a hefty chunk of money to pay if the recommendations are likely to be 'make no change'.

I guess I have formed a rough opinion for my circumstances, and just wanted to see if his outlook in any way matched mine.

My current view is :
+ Transfer value of 20x DB == don't waste money evaluating.
+ Transfer value of 30x DB == starting to get interesting, but nowhere a near certainty - you may waste your evaluation fees.
+ Transfer value of 40x DB == probably compelling reasons to investigate a transfer.

Because he couldn't/wouldn't give any parameters/methodology outline for the evaluation (even my local garage describes the broad outline of work before I commit to a repair, or says the repair is going to cost more than the car is worth etc), I didn't feel comfortable that he was the right IFC for me.

BTW I have since spoken to The Pension Advisory Service (http://www.pensionsadvisoryservice.org.uk) and they gave some excellent generic advice about the parameters to consider when transferring out of a DB scheme. Their advice was free, and it was exactly the information I was looking for - I was very impressed!

..NC

[pompeygazza]

so are you going to share the advice?

[NotoriousCanary]

so are you going to share the advice?

Well, (as a 52 year-old who has different sources of income, so not completely reliant on pensions) I looked at the transfer value offered (37x DB benefits) and used the FTSE dividend rate (3.7%) to calculate that I could earn about double in dividends compared with DB. But of course, that is not guaranteed income whereas the DB pension is.

TPAS man said I had to pay close attention to inflation (DB pension is index-linked as long as inflation isn't above 5%, and that is valuable), but the valuation methodology is basically reasonable and a lot would depend on my attitude to risk. I'm trading off doubling my income with uncertainty in the future, versus a less but guaranteed DB income.

So I've decided I'm interested enough to pay for the switching advice from an IFA, if I can find one I like.

BTW this is not meant as advice for anybody else (whose circumstances are likely to be very different to mine) - I'm just trying to work out my best options.

Just for completeness, there are some online articles that might give different perspectives.

Merryn Somerset Webb's article in the FT started me of thinking about this : https://www.ft.com/content/a182ecd6-b7d ... d1533d9a62
Baroness Altmann (former pensions minister) has cashed in (although I think her DB pensions were not index linked), as has Martin Wolf who reckons he will almost certainly be better off unless capitalism dies (in which case he would't be getting his DB pension either) : http://retirementgenius.co.uk/stampede- ... -pensions/

And for balance, John Ralfe the FT yesterday is saying don't cash in a DB pension : https://www.ft.com/content/9bfda9b2-ec9 ... 9a44939bb6

I'm still trying to gather other information, so any pointers very welcome.

..NC

[Wasron]

I got a cetv from a DB scheme in November 2016 and it was 34x. My reason for looking to transfer is that the scheme has been made less attractive over the last few years by breaking accrual from actual pay rises, exposing me to inflation, so I'm about to transfer to an A J Bell SIPP. I'm waiting to see what the value is three months on as I had to become a deferred member first, and as inflation has increased in the meantime I'm anticipating a drop of 3-4% on the cetv.

I'm not sure how much difference age makes, but I'm only 39.

My plan is to avoid annuities altogether and use drawdown from an income-oriented portfolio.

Wasron

[parallellines]

My current view is :
+ Transfer value of 20x DB == don't waste money evaluating.
+ Transfer value of 30x DB == starting to get interesting, but nowhere a near certainty - you may waste your evaluation fees.
+ Transfer value of 40x DB == probably compelling reasons to investigate a transfer.

Just a general health warning about rules of thumb like this, not necessarily applicable to you

Different pension schemes quote different amounts:

- some quote the deferred pension when you left (eg ten years ago)
- some quote the current pension with indexation to date
- some quote an estimated pensionat retirement ( allowing for future indexation)

It's almost unheard of to get all three.

It's obviously critical to use the right pension in the rule of thumb!

[Wasron]

I'm waiting to see what the value is three months on as I had to become a deferred member first, and as inflation has increased in the meantime I'm anticipating a drop of 3-4% on the cetv.
Wasron

My revised cetv arrived today and happily it hadn't dropped at all. So full steam ahead with the transfer out

[Fluke]

Just a general health warning about rules of thumb like this, not necessarily applicable to you

Different pension schemes quote different amounts:

- some quote the deferred pension when you left (eg ten years ago)
- some quote the current pension with indexation to date
- some quote an estimated pensionat retirement ( allowing for future indexation)

It's almost unheard of to get all three.

It's obviously critical to use the right pension in the rule of thumb!

So what is the figure you should use? I too have a similar decision to make.

[FanciThat]

Just a general health warning about rules of thumb like this, not necessarily applicable to you

Different pension schemes quote different amounts:

- some quote the deferred pension when you left (eg ten years ago) (A)
- some quote the current pension with indexation to date (B)
- some quote an estimated pensionat retirement ( allowing for future indexation) (C)

It's almost unheard of to get all three.

It's obviously critical to use the right pension in the rule of thumb!

So what is the figure you should use? I too have a similar decision to make.

Well I have just got a CETV from my (frozen in 2008) DB Pension Scheme, they don't quote a multiple, they just gave me a value based on the 2008 pension, I worked out the multiples myself, which were 26.7x (A), 21.3x (B) and 19x (C). So it was quite a bit less than I was expecting.

[Fluke]

Well I have just got a CETV from my (frozen in 2008) DB Pension Scheme, they don't quote a multiple, they just gave me a value based on the 2008 pension, I worked out the multiples myself, which were 26.7x (A), 21.3x (B) and 19x (C). So it was quite a bit less than I was expecting.

The valuation I've just received (frozen in 2001) is:

35 x A
41 x B
24x C

I'm still in 2 minds but by comparison I'm borderline transfer.

Try this calculator, it might help.

http://www.telegraph.co.uk/pensions-ret ... valuation/

[DrBunsenHoneydew]

The valuation I've just received (frozen in 2001) is:

35 x A
41 x B
24x C

Have you reversed A & B?

[Fluke]

Have you reversed A & B?

I'm interpreting B as meaning the pension you would get were you to retire (early) today, is that not right?

[DrBunsenHoneydew]

ABC should be in size order.
If you retired in 2001 and at that time were told you have a deferred pension of 10k payable at say age 60, (A), and made enquiry today, at age age 55 say, they would say because of inflation protection you are now entitled to £14k at age 60 (B), and because of predicted inflation in the coming 5 years we expect you to get £16k payable from age 60 (C).

[Alaric]

ABC should be in size order.

The amount the scheme would pay you if you retired immediately is a fourth amount. That can be compared directly to the transfer value, assuming you invested the transfer value with the objective of taking an immediate income. Early retirement values may not be entirely consistent with transfer values though.

[DrBunsenHoneydew]

The amount the scheme would pay you if you retired immediately is a fourth amount. That can be compared directly to the transfer value, assuming you invested the transfer value with the objective of taking an immediate income. Early retirement values may not be entirely consistent with transfer values though.

Yes the amount you'd get today (D) would be a proportion of B, usually reduced by 4-5 % for each year you are taking it early before the normal retirement age. I agree that the CETV quote does seem to vary depending on circumstances - this is because they have build in to the higher CETV the fact that you might exercise some form of favourable option at age 60 that is not available to those who start to take the pension early.