A new DWP consultation [PDF] was launched today on draft regulations on the calculation of pensions transfer values, to be based on the expected cost to the scheme of providing the pension. (The draft regulations only apply to outgoing transfers: it will be for trustees to decide how to award benefits in respect of incoming transfers.) The Government announced in January 2007 that trustees will be required to determine assumptions in the calculation of pensions transfer values on a "best estimate" basis. Discount rates will have regard to "best estimates" of future returns. The objective of this approach is to avoid jeopardising the success or sustainability of the pension scheme by any transfers that do take place.

The draft regulations follow a Government consultation a year ago on approaches to calculating transfer values. The great majority of the sixty-nine respondents favoured a "scheme specific" approach over the alternatives. The Government published its response to that consultation in January this year (see Aries review).

The consultation runs until 17 August 2007 (the original plan, as we noted in our earlier article, was to draft Regulations "in the early part of 2007" and have them laid "in the middle part of 2007" to give schemes time to prepare before these new arrangements come into effect on 6 April 2008).

The current arrangements for the calculation of cash equivalent transfer values have broadly been in place since the mid-1980s. Regulations set out the structure for the way that cash equivalents are to be calculated and a mandatory Guidance Note (GN11) [PDF], issued by the Actuarial Profession, contains the detailed framework for the calculations. (In April 2007 GN11 was adopted by the Board for Actuarial Standards.) At present there are no plans for the Board for Actuarial Standards to issue a standard to support the new Transfer Values regulations.

The condoc discusses a number of issues which have arisen in the process of transposing GN11 into regulations:

(a) Minimum amount

The new Transfer Values regulations are intended to define the minimum level for cash equivalent transfer values. The regulations do not prevent trustees from paying higher amounts if they consider it appropriate (subject of course to scheme rules and trust law etc).

(b) Role of employer

The draft regulations provide that the trustees are to be responsible for deciding the assumptions to be used in the calculation of transfer values, and, in doing so, to balance the interests of the various groups in the scheme. The argument that the employer should be required to agree the assumptions, to mirror the arrangements in the Scheme Funding legislation, has been rejected.

(c) Administrative savings

Paragraph 18 of Schedule 1A to the draft regulations provides that where the member is transferring out of the scheme, the "initial cash equivalent" may be reduced to reflect any reasonable administration cost incurred by the scheme.

(d) Disclosure of assumptions

There is no requirement in the regulations for the trustees to disclose the assumptions they have used to calculate a transfer value. To add such a requirement would be an extra burden for schemes, but, says the DWP, "it would be good practice for schemes to provide this information on request".

(e) HM Treasury guidance

For many public service pension schemes, a separate way of determining discount rates will be necessary because of the way they are structured. Treasury guidance will therefore set out the methodology these schemes are to use.

(f) Guaranteed statements of entitlement

The existing requirements of SI 1996/1847 Reg 6 for guaranteed statements of entitlement to be issued within set deadlines are under review.

(g) Transitional issues

Under the regulations, from 6 April 2008 the trustees will become responsible for the calculation of cash equivalent transfer values. For salary related schemes, the date the cash equivalent is calculated will be the guarantee date. For money purchase schemes, the relevant date for the purposes of the calculation is either the date of application for the cash equivalent or the date of termination of pensionable service.

Money Purchase Schemes: Calculation of Cash Transfer Sums

Following lobbying by the SPC, the regulations also include an important amendment which amends the "early leavers" regulations (The Occupational Pension Schemes (Early Leavers: Cash Transfer Sums and Contribution Refunds) Regulations 2006 (SI 2006/33) to change the arrangements by which the cash transfer sum is valued. Section 101AB(3) of the Pension Schemes Act 1993 provides that "cash transfer sum" means the cash equivalent at the date on which pensionable service terminates.

However there could be a significant passage of time between the date on which pensionable service terminates and the date when the member notifies the trustees whether he wants a cash transfer sum or a contribution refund. In that period, the amount of the cash transfer sum may have changed because of payments of interest or more particularly changes in the value of underlying investments. Thus the present regs are unworkable for money purchase schemes.

New regulation 2C(3), on page 18 of the draft regulations, provides that the initial cash transfer sum may be increased or reduced to reflect its value at the date of surrender or disinvestment.

Other consequential amendments

Other sets of regulations make use of the cash equivalent methodology to value pension rights for other purposes, in particular for pension sharing on divorce. The new Transfer Values regulations therefore make consequential amendments to a number of other sets of regulations which involve the valuation of pension rights:

• -The Personal Pension Schemes (Transfer Values) Regulations 1987 (SI 1987/1112);
• The Personal and Occupational Pension Schemes (Protected Rights) Regulations 1996 (SI 1996/1537);
• The Pensions on Divorce etc. (Provision of Information) Regulations 2000 (SI 2000/1048);
• The Pensions on Divorce etc. (Charging) Regulations 2000 (SI 2000/1049);
• The Pension Sharing (Valuation) Regulations 2000 (SI 2000/1052);
• The Pension Sharing (Implementation and Discharge of Liability) Regulations 2000 (SI 2000/1053);
• The Pension Sharing (Pension Credit Benefit) Regulations 2000 (SI 2000/1054); and
• The Occupational Pension Schemes (Modification of Schemes) Regulations 2006 (SI 2006/759).

Issues outstanding

The DWP said it would give further consideration to number of pertinent issues raised by respondents to the 2006 consultation. Some of those apparently remain to be addressed. These include

• the condition denying the statutory right to transfer within twelve months of NPA;
• the ban on partial transfers in PSA 1993, inconsistent with FA 2004;
• inducements whereby CETVs are enhanced by employers to encourage transfers out; and
• whether generic information, produced by regulators, should be given to members considering a transfer out.