The scheme actuary’s aim is to calculate the “best estimate” of the amount needed to buy the equivalent to the scheme entitlement. The actuary has to tread a careful line to be fair to both sides, ensuring any transferring member and those remaining in the scheme are not left worse off.
Transfer values are usually less than the amount the scheme aims to hold for the member as they exclude any additional margins for smoothing out adverse experience. This means members transferring out usually create bigger margins for the remaining members. Stayers would still only receive their entitlement under the rules, but the scheme’s assets are more likely to be sufficient to pay them and employers are less likely to have to increase their contributions.
However, if the scheme is underfunded, paying out a full transfer value could mean remaining members are left worse off. Underfunded schemes – those with a poor outlook for returning to full funding – may reduce transfer values (an “actuarial reduction”) so as not to disadvantage those left behind even further.
Because the market value of the scheme’s assets – from which the transfer value would be paid – changes frequently, technically transfer values should also change frequently to make sure leaving members are not given too little or too much.
Depending on the scheme’s systems and processes, transfer value calculations can be updated anything from daily, monthly, quarterly or perhaps only when key indicators (for example, interest rates or equity market levels) move outside a certain range. As market conditions can change considerably over days or weeks, let alone months, any delay in updating transfer terms could have a significant impact on transfer values for members and their schemes.
Schemes also have to guarantee their transfer value quotations for a period of at least three months to give members time to make arrangements with an insurer. Therefore, by the time a payment comes to be made it may no longer be the appropriate amount, with the scheme either paying too much if terms have worsened or vice versa. In some cases, schemes will offer the member the better of the original terms or those at the time of payment.
The impact is likely to be slight for an individual member with a modest entitlement. However, when members with larger entitlements transfer or there are groups of transfers – as in recent times following pension freedoms and scheme de-risking – transfer values can have an impact on the scheme: both on funding and liquidity levels.
