Corporations that offer a Defined Benefit Pension to their employees have recently been offering members of their scheme an alternative method of drawing down their pension. A legislation change in June 2016 has allowed this new option to be offered. This option can have some very tangible benefits for both the Company and the member (either a current or deferred member).
Would you like to enquire about your Previous Pension?
The Employers risk exposure with Defined Benefit Schemes
The problem with DB schemes for the employers is;
- With mortality rates increasing, it is uncertain as to how many years the company will have to keep paying the annual pensions to its all of its retired employees?
- If the overall Company pension scheme fund decreases in value, how will these pensions be paid on an annual basis if the money isn’t in the pension pot?
- This pension fund is classed as a liability on companies the balance sheet. This can have a negative impact of the share price or market valuation of the company. This becomes a major problem if/when the company decides to prepare themselves for a potential acquisition or buyout as the pension fund can decrease the Net asset Value of the Company.
In order to address these issues many companies, particularly those who wish to prepare for an acquisition or buy-out, have started to offer enhanced transfer values to its employees/ex-employees on their individual pension pots in order to entice them to transfer out of the scheme. This in turn will decrease the company’s liability on their balance sheet.
In summary ETVs give Companies a cost-effective means of materially reducing pension risk and potentially improving their scheme’s funding position. They also give members additional flexibility and choice.
How ETV’s work in more details:
The problem with DB schemes for the employers is;
- Current employees where schemes have ceased to accrue future service benefits, and
- Deferred members (former employees not yet in receipt of their benefits).
Current employees may be offered the option to transfer to their employer’s defined contribution scheme while deferred members may be able to transfer to another approved pension arrangement.
Typically Transfer values are not lucrative enough to entice employees, especially younger members, to transfer out of the existing DB scheme. To make the transfer option attractive to members, it may be necessary to offer them an Enhanced Transfer Value (ETV).
Benefits to the Company and Scheme:
If either a current or ex-employee accepts an ETV, their liabilities are removed from the DB scheme. This, in turn, reduces both the size of the scheme liabilities and the associated risk. ETVs can offer a significant saving against company accounting reserves, scheme funding and ultimate buyout costs. This is why such lucrative Transfer Values are now being offered to members of their scheme.
The ETV also:
- Extinguishes all future scheme pension risk associated with the member once they transfer from the scheme
- Reduces accounting funding volatility
- Reduces the scheme’s long-term operating costs
- Has a potentially positive impact on financial institutions from a regulatory capital perspective
- Demonstrates to key stakeholders that pension risk is being managed
- Reduces future regulatory risk
Benefits for Members:
ETVs have numerous potential benefits for members:
The ETV also:
- They enable deferred members aged over 50 to access their pension immediately
- A member may receive a higher tax-free lump sum
- They enable flexibility in benefit provision and ownership of investment decisions
- The member receives a higher transfer value than normal
- Ring-fence members’ assets and removes any risk caused by the scheme or employer g. that the scheme winds up in deficit or benefits are reduced
- An ETV may be considered to offer good value
- An ETV may suit the member’s personal circumstances in terms of health, marital status and financial status
