Defined benefit statistical analysis
A pension transfer specialist will use a technical analysis tool to value your DB scheme benefits against the CETV. The CETV is the Cash Equivalent Transfer Value; the amount the pension trustees will offer you to take away to your own private plan.
The statistical analysis used by a Pension Transfer Specialist is called the Appropriate Pension Transfer Analysis (APTA), and includes a Transfer Value Comparator (TVC). The APTA is the most recent type of statistical analysis which must be conducted for all DB pension transfers, as directed by the UK regulator, the Financial Conduct Authority (FCA).
The APTA and TVC replace the previously used Transfer Value Analysis System Report (TVAS Report), but are very similar. The new analysis tools and reports aim to further highlight the risk and costs of pension transfers.
Understanding your APTA and TVC Report
The income projected in your report is an estimate of the starting income you would get from your existing scheme benefits. The analysis system has taken information from your existing pension scheme, such as preserved income benefits and inflationary measures to predict the income due to you at the scheme’s retirement age.
What is the Critical Yield?
The critical yield is an estimated annual return required to match the scheme benefits under the proposed plan. A high critical yield should act as a transfer warning. It is the average annual growth percentage your pension funds must achieve each year from the point of transfer to the normal retirement date of the scheme, to match your existing scheme benefits. To ‘match’, the final pension value at retirement must be enough to be used to purchase a pension annuity. An annuity is an insurance company-backed guaranteed pension income for life. The annuity used in the comparator should carry similar inflation and death benefits.
A critical yield under 10% shows a good transfer value in comparison to the income benefits held. Critical yields over 15% should be considered a transfer warning. However, the benefits of flexibility and functionality of private pensions often outweighs the statistically assessed value of a scheme CETV.
The critical yield can become skewed as a member approaches retirement, this is because any transferred funds would have little time to grow to the scheme’s retirement age. As a pension member approaches retirement age, analysis focus turns to functionality and the need for secure income. At retirement age, it is easier to compare like for like pension options when cosnidering a transfer rather than need to project funds for the years of time to retirement age.
What is the hurdle rate?
The hurdle rate is the estimated rate of return required from the proposed plan to achieve a fund from which a level (non-inflation linked) annuity can be purchased, at a value matching the starting income of the existing scheme. Unlike the critical yield, this analysis does not account for an annuity to include a spousal benefit or guarantee period.