CETV and Incentive Exercises

Question 1

Legislation for 2 CETV Methods

Answer 1

Best Estimate method which is based on providing the members benefits in the scheme. This is the normal method.

Alternative Method used when trustees want to pay CETVs above the minimum. There is no prescribed method for this.

Question 2

CETV Calculation

Answer 2

STEP 1 - Calculate the pension at date of leaving scheme

STEP 2 - Revalue the preserved pension to the schemes NPA

STEP 3 - Calculate the capital cost of buying the revalued pension at the schemes NPA

STEP 4 - Discount the cost back to the date of the calculation. This figure is known as the Initial Cash Equivalent (ICE)

STEP 5 - make any adjustment to ICE (i.e. for scheme underfunding , allowances for discretionary increases)

Question 3

Factors affecting the CETV

Answer 3

RCD - Revalue , Capitalise & Discount

REVALUE

Pension at date of leaving scheme revalued to Pension schemes NPA. Assumption made for inflation using RPI, CPI or AEI.

CAPITALISE

Pension schemes NPA > Capitalised value of pension using assumptions for annuity rates. Escalation rates have the biggest impact on annuity rate.

DISCOUNT

Capitalised Value of Pension Discounted to take account of investment returns until NPA. < 10 years then Average Gilt Yields will be used. >10 Years then asset mix of pension will be used (likely to be equity returns)

Question 4

Enhanced Transfer Value (ETV)

Answer 4

Offered by scheme as a way of encouraging deferred members to transfer

Done to help reduce schemes future liabilities and risk

Usually offered for a limited period e.g. 3 months

The cost of providing the enhancement is covered by sponsoring employer to ensure the security of the remaining members is not compromised AND scheme is likely to be underfunded

Question 5

Pension Increase Exchange (PIE)

Answer 5

Exchanging a higher initial income for no escalation in retirement

BENEFITS

Higher initial Income
Higher PCLS
Higher Spouses Pension
May benefit those with reduced life expectancy or client who intend to spend more earlier in retirement

DRAWBACKS

Member may live beyond break even point
Higher value tested against LTA
May affect members State benefits 
Inflation may be higher than expected 
May push member into higher rate income tax band

Question 6

Transfer Club

Answer 6

Typically public sector schemes. DB to DB transfer - police , fire, teacher,NHS

Value calculated in normal way (CETV)

Receiving scheme calculates service credit using a standard set of actuarial tables used by all club schemes

Calculation uses the members salary in old scheme regardless of new salary

Transfer between schemes with identical provisions will produce a year-for year credit

Where there are differences , for example different pension ages , a higher or lower credit may result