Transfers in and Out Fact Finding (Final Salary)


Salary Related Schemes 

In a salary related scheme, often referred to as a defined benefit scheme, the scheme rules will describe how a member's benefits should be calculated on leaving service, retirement or death. This element of the resource material will concentrate on the calculation and communication of transfer benefits for a salary related scheme.

The case studies that you will study in the examinations will include two (2) salary related schemes, one of which is a CARE (Career Average Revalued Earnings) scheme:

  • The RST Pension Scheme (which is not contracted out)
  • The XYZ Pension and Life Assurance Scheme (which was contracted out for Category A members until 5 April 2016 but was never contracted out for Category B members)

There are two (2) distinct transfer calculations and candidates will be tested on each of these in the examinations:

  1. Transfers out (for members who are "preserved")
  2. Transfers in (for members who are “active”)


Fact Finding

1. How are transfers out handled?

The 1985 Social Security Act required that any member who left pensionable service on / after 1 January 1986 with rights to a preserved pension had to be offered a cash equivalent transfer value. The Pensions Act 1995 extended this right to all leavers with entitlement to a preserved pension regardless of the date of leaving pensionable service. Under current legislation, a cash equivalent transfer value is required to be offered after leaving a scheme with three (3) months of pensionable service.

Members may transfer the value of their benefits to one of the following:

  1. A new employer’s scheme; or
  2. An insurance policy; or
  3. A personal pension scheme / stakeholder arrangement

A Cash Equivalent Transfer Value (CETV) represents the expected cost of providing the member`s benefits within the scheme. In the case of money purchase benefits, this is generally straightforward since it is the accumulated contributions made by and on behalf of the member together with investment returns. In the case of defined benefits, the CETV is a value determined on actuarial principles, which requires assumptions to be made about the future course of events affecting the scheme and the member`s benefits.

A new regime governing the payment of cash equivalent transfer values (CETVs) from occupational defined benefit schemes was introduced from 1 October 2008. It is now the responsibility of the trustees to set the transfer value basis. Previously, the calculation had to be in accordance with Guidance Note 11 of the Institute of Actuaries.

The Legislation provides for two methods for calculating CETVs:

  1. Method based on a "best estimate" of the cost of providing the member's benefits in the scheme; or
  2. Method where trustees want to pay CETVs above the minimum amount

The best estimate method involves the calculation of an 'initial cash equivalent' (ICE). This is the amount of money needed at the effective date of the calculation which, if invested by the scheme, would be just sufficient to provide the benefits.

Generally the principles underlying the calculation are:

  1. It should be calculated with regards to the member's accrued benefits; and
  2. It should include any options and discretionary benefits that the trustees decide should be included; and
  3. It should take account of the scheme's investment strategy when choosing assumptions as to the investment returns to be expected

The ICE may be adjusted, in certain circumstances, to arrive at the final CETV. One of the permitted reductions is to allow for the funding position of the scheme. However, trustees may only reduce ICEs for this reason after obtaining an assessment by the actuary (in the form of an `insufficiency report`) of the funding of the scheme using the transfer value assumptions.

When a cash equivalent quotation is issued to a deferred member of a defined benefit scheme, the trustees must inform the member that information about the transfer can be obtained from the Financial Services Authority, the Pensions Regulator or the Pensions Advisory Service. Such information may be useful in assisting the member to make an informed decision on whether to proceed with a transfer.

Both the RST Pension Scheme and the XYZ Pension and Life Assurance Scheme carry out a single transfer value calculation.

2. How are transfers out from contracted-out schemes handled?

If a member transfers out benefits from a salary related scheme, then the transfer value will typically be used to secure benefits with the occupational scheme of the new employer or with an insurance company through an insurance policy or a personal pension arrangement.

If there is a Guaranteed Minimum Pension (GMP) under the transferring scheme (i.e. it is a contracted-out salary related scheme), then care must be taken to ensure that the receiving scheme or policy is suitable for providing contracted out benefits.

If the transfer is to an approved contracted-out salary related scheme, then there is no problem with the scheme receiving the transfer (subject to the approval of the trustees).

Historically, if the transfer was to an approved contracted-out money purchase arrangement, then the scheme was able to receive the contracted out benefits. In such cases, the value of any GMP and post 1997 benefits being transferred were treated as protected rights. However, with effect from 6 April 2012, contracting out has not been permitted for money purchase arrangements and so contracted-out benefits can no longer be transferred.

If the receiving scheme is unable (or unwilling) to accept the GMP liability, then the available options are as follows:

  1. Leave the GMP in the scheme from which the transfer is being made; or
  2. Transfer the GMP to an individual policy which is able to receive it (e.g. an individual buy-out policy)

For a transfer to an insurance policy, usually a Section 32 Buy Out policy, the GMP must be guaranteed within the insurance policy.

For the purpose of the CPC examinations, it should be assumed that the transfer value to be calculated from the XYZ Pension and Life Assurance Scheme will include a GMP element. The calculation of this element is split into three (3) parts. These are detailed in the Tables of Factors booklet.

3. What about post April 1997 benefits?

If a transfer value contains post 5 April 1997 benefits, then the value of these benefits need to be identified separately. For the RST Pension Scheme, this involves calculating the transfer value for the benefits accrued between 6 April 1997 and 5 April 2006 and then calculating the transfer value for the benefits accrued from 6 April 2006.  The calculation is in two (2) parts due to the fact these elements of pension increase at different rates in payment.

4. How are transfers in handled?

A transfer in may arise in respect of a member's retained benefits in a previous employer's scheme or from a personal pension.

Prior to 1 October 2008, it was a requirement under Guidance Note 11 of the Institute of Actuaries that transfers in used methods and assumptions consistent with those of a transfer out. This requirement has now been removed, although when the trustees are choosing transfer in assumptions it will usually be appropriate for them to be consistent with the transfer out basis.

The calculation of a transfer credit should take into account the following principles:

  1. The transfer credit (from a transferring member's perspective) should be fair value for any transfer received; and
  2. The transfer credit should not be expected to prejudice the security of existing members' benefits; and
  3. The transfer credit should not be expected to require additional funding from the employer in the long term unless agreed in advance.

TIP: A transfer in is really like a transfer out in reverse!

For a scheme that is not contracted out, like the RST Pension Scheme, the calculation is in two (2) parts:-

Firstly, the transfer value is divided by a market level adjustment factor and from this is deducted the cost of refunding the member contributions on death before retirement.

The cost of refunding the contributions on death before retirement is calculated using the formula below:

Member’s contributions x rate for valuing member contributions (see Table of factors)

Please note that the calculation relating to the pre 6 April 2006 and post 5 April 2006 contributions needs to be done separately to identify the relevant splits. However, the factor to be used in the calculation for each element is the same.

Secondly, the balance of the transfer value is divided by the rate for valuing the excess pension (see the Tables of Factors booklet) to determine the additional pension secured by the transfer in and payable from normal pension date.

Once again, it should be noted that the balance of pension for the pre 6 April 2006 and post 5 April 2006 elements needs to be calculated separately, although this time using different factors. As with the transfer out calculation, the post 5 April 1997 element must be calculated and shown separately.

5. How are transfers in to contracted-out schemes handled?

Contracted-out cases are again a little more complicated! In order to calculate the balance of the transfer value available to purchase a pension in excess of the Guaranteed Minimum Pension (GMP) for the XYZ Pension and Life Assurance Scheme, both the cost of the return of contributions on death and the cost of buying the GMP benefits need to be deducted.

TIP: If the transfer in is not sufficient to cover the GMP liabilities, then the case should be referred to a manager.

It is important to remember that, for the XYZ Pension and Life Assurance Scheme, the transferred-in GMP payable from normal pension age (65) needs to be added to the transferred-in excess pension payable from normal pension age to derive the total transferred-in pension payable from normal pension age. In addition, it needs to be remembered that the post 5 April 1997 transferred-in benefits must be detailed separately.

6. How are communications with the member / trustees made?

Once the benefits have been calculated they need to be communicated to the member and / or trustees of the scheme in the form of a letter. The examinations will expect candidates to write letters to include all the facts and figures that are required to be communicated.

For the examination, candidates will be expected to produce one letter for a transfer in case and one letter for a transfer out case.

For transfer out case studies from the RST Pension Scheme and the XYZ Pension and Life Assurance Scheme all letters should include the following (where applicable):

1. Date of calculation

2. Amount of total transfer value

3. Amount of AVCs included in transfer value (if any)

4. Amount of transfer value relating to post-1997 element (if any)

5. Options for the transfer value

6. If transferring to an arrangement where benefits can be accessed flexibly:

  1. mention requirement to take independent financial advice from an authorised provider regulated under Financial Services and Markets Act 2000 (if TV exceeds £30,000)
  2. mention that written request to apply for transfer must be made to trustees within three (3) months of TV guarantee date
  3. mention requirements to confirm to trustees within three (3) months of receiving TV quotation that independent financial advice has been received
  4. mention trustees will verify within six (6) months of TV guarantee date that independent financial advice has been received AND carry out transfer
  5. mention that, unless evidence exists to the contrary, trustees will assume TV will be to an arrangement where benefits can be accessed flexibly

7. Statement that financial advice cannot be given

8. Reference to "Pension Scams"

9. Statement that if transfer out proceeds, no benefits will remain in the existing scheme

For transfer in case studies from the RST Pension Scheme and the XYZ Pension and Life Assurance Scheme all letters should include the following (where applicable):

1. Amount of transfer value (including the post 1997 transfer value) and date of calculations and post 2006 transfer value, if applicable

2. Details of benefits that can be provided by that amount (e.g. pension at NPD of £ ... and refund of member's contributions on death before retirement of £ ...

3. Post-1997 benefit amount and post-2006 benefit amount (if applicable)

4. Pre-1988 GMP and post-1988 GMP amounts payable from NPD (if applicable)

5. Spouse's pension

6. Statement that benefits provided by the transfer in will be subject to the rules of the receiving scheme

7. Statement that if transfer in proceeds, no benefits will remain in the previous scheme

8. Expiry date for the quotation

9. Statement that the writer may not give financial advice

10. Statement that the member's written authority is required if the transfer in is to proceed

These lists are not definitive and all letters must, for example, refer to any special circumstances and additional information contained in the case study.