Yesterday the DWP announced its decision on the way that pensions transfer values are to be calculated in future for members transferring from defined benefit occupational pension schemes. As expected, it has plumped for the least change to the status quo, rejecting alternatives - in particular the EXD54* approach, which may have been more favourable to members choosing to transfer - on the grounds that they might jeopardise the success or sustainability of pension schemes.

*a draft revised version of actuarial guidance note GN11 (transfer values), known as Exposure Draft 54 [PDF]. The general principle proposed in EXD54 was that cash equivalents must be no less than the value of the relevant benefits calculated on a marked-to-market basis (meaning discounting using appropriately derived bond discount rates (real rates and/or fixed rates as appropriate) which reflect the default risk of the relevant benefits). This involved a fairly radical change from the existing less prescriptive approach, which requires a cash equivalent to represent the expected cost within the scheme of providing the deferred benefit entitlement, "having regard to market rates of return on equities, gilts or other assets as appropriate". In 2005 the Actuarial Profession found no consensus among actuaries on the proposed change. The main concern was that on the EXD54 basis transfer values would be significantly higher, increasing the funding burden on defined benefit schemes.

The Government's view is that the primary purpose of a pension scheme is the provision of pensions, not transfers. As most schemes are currently underfunded, a transfer payment calculated on the EXD54 basis would often be to the detriment of remaining members of the scheme and lead to a requirement for the employer to pay additional contributions. Instead, therefore, transfer values will continue to be calculated based on the expected cost to the scheme of providing the alternative deferred pension. Members will continue to have a statutory right to transfer, subject to meeting the existing conditions, and to request a CETV quotation once a year.

The details are contained in a formal Government response to last summer's consultation, in which the great majority of the 69 respondents backed the scheme-specific basis (although on most questions a very wide range of views emerged). Trustees will be allowed to determine, on a "best estimate" basis and on actuarial advice, the actuarial assumptions to be used in the calculation, including mortality (these will not normally be the same assumptions adopted for scheme funding). The discount rate used in the calculation may reflect their "best estimate" of future returns, taking into account the existing asset mix of their scheme. Trustees will continue to have the power to reduce transfer values if the scheme is underfunded, and to deduct any reasonable administrative costs incurred. However, more information will have to accompany transfer value quotations, to help members decide what to do.

Regulations are to be drafted "in the early part of 2007" and laid "in the middle part of 2007" to give schemes time to prepare before these new arrangements come into effect in April 2008 (the DWP's original aim was to bring in the new rules from April 2007). The regs may amend the Occupational Pension Schemes (Transfer Values) Regulations 1996 (SI 1996/1847, as amended) and transpose into law a number of the requirements in GN11 v9.2 [PDF] (30 December 2005), both of which until then remain in force. The Board for Actuarial Standards is supposed to have taken over responsibility for GN11 last year, but it is not included in the list of GNs on the Board's website. We understand GN11 is to be adopted by the Board in April 2007*.

* A newly-published SI, The Occupational and Personal Pension Schemes (Prescribed Bodies) Regulations 2007 (SI 2007/60) updates references to the prescribed body in a number of occupational and personal pension scheme regulations as a consequence of the transfer of certain functions relating to the regulation of the actuarial profession from the Faculty of Actuaries and the Institute of Actuaries to the Board for Actuarial Standards. The regs cite GN11 in a number of places and come into force on 6 April 2007.

Although the outcome of this consultation seems to have left the status quo largely undisturbed, a number of pertinent issues were raised by respondents to which the DWP says it will give further consideration. These include

• the use of CETVs in pension sharing on divorce
• the use of CETVs to state directors’ pensions in company accounts
• 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
• whether generic information, produced by regulators, should be given to members considering a transfer out.

Other news

The first Government amendments to the Pensions Bill presently before Parliament have been tabled, immediately after second reading (this Bill will no doubt also quickly become recognised as another "work in progress"). In view of the latest alarm about anticipated 'U-turns' by the Government on simplification (ie that the DWP's proposals last autumn that on abolition of DC contracting-out, protected rights should be treated like non-protected rights will not be enacted), it is interesting to note the following amendment:

"Clause 15 , page 18 , line 36 , at end insert --

'(1A) The Secretary of State may (whether before, or on or after, the abolition date) by regulations amend, repeal or revoke any protected rights provisions'’."