Government reveals pension fund transfer calculation method

Employers have received a pensions funding boost after the government finally announced how transfer values will be calculated.

Minister for pensions reform James Purnell revealed that the values would be calculated according to the expected cost to the scheme of providing the pension.

“After an extensive consultation it has become clear that the great majority favour this way of calculating pensions transfer values,” he said. “This approach will mean that the success or sustainability of the pension scheme is not put in jeopardy by any transfers that take place.”

Businesses had feared a more expensive calculation would be used, adding billions of pounds to company costs.

Patrick Bloomfield, partner at law firm Hymans Robertson, told Reuters: “Finance directors will be breathing a sigh of relief over the government’s latest proclamation on pensions.

“Alternative proposals could have been a back-door introduction of more stringent pension funding targets than currently apply.”

However, Bob Scott, partner at law company Lane Clark & Peacock, said employers should not breathe a sigh of relief yet.

“In an ideal world, this would mean business as usual but, with the process due to be laid down in regulations, the pensions industry faces an anxious wait before we learn what further regulatory and compliance obligations and costs will be imposed on schemes,” he said.

According to the government, the regulations will make the following points:

• The trustees of the pension scheme will be responsible for the determination of the actuarial assumptions used to calculate transfer values.
• The trustees will be required to determine the assumptions in the calculation of transfer values on a “best estimate” basis.
• The trustees will be required to use a discount rate in the calculation of transfer values which reflects a “best estimate” of future returns, having regard to the existing asset mix of their scheme.
• The trustees will continue to be able to reduce transfer values where the scheme is underfunded.
• The trustees will be allowed to deduct any reasonable administrative costs incurred from the transfer value.
• The trustees will have to provide members considering whether to transfer with more information.

These new arrangements are due to come into effect in April 2008.