With Profits - current or transfer value for pension transfer analysis
Sam_T
Member
Hi there
Currently having a tussle with our compliance team and wanted to know what others do... when looking at a DC pension with With Profits, which has a Terminal Bonus (TB), the quoted transfer value is higher than the 'current value'
We use SelectaPension to do a transfer analysis mostly based on cost and projected values - as the TB will be secured on transfer, this value is pulled through to project the value for the proposed new plan, whilst the ceding plan is projected on the lower current value (as the TB is not guaranteed). This obviously makes the new plan a more attractive prospect even if the charges are higher, as the plan value is immediately increased by the TB on transfer.
Does anyone just use the CV on both projections?
Thanks
Comments
Nope. Your way is, in my view, correct. CV for current scheme; TV for new scheme. If compliance say CV for both ask them what they would say if TV was less than CV.
Thanks Richard - my argument exactly, but feel like I am not getting very far with them!
If you think about what you're trying to achieve, it's to show the client a comparison of the costs they are paying vs what they would pay. As soon as the value is out of balance on one side (other than for a charges related penalty) then using a future projection method fails to meet the overriding objective.
Selectapension is a future projection method cost comparison tool.
Just because the client doesn't realise the TB until they switch out of the WP fund, doesn't mean that they aren't effectively paying the costs of that amount.
The costs of most WP funds are implicit and shared across all policyholders. It stands to reason that if I have 10 units in my policy and 10 units of terminal bonus were I to switch, I will be paying the costs related to 20 units at that point in time. In other words, if the cost of managing my 10 units is 1 unit per period, then with all other aspects equal my TB would also reduce by 1 unit over that period.
For this reason, I use the transfer value on both sides of a cost comparison where a TB/MVA is involved. But I don't use projections to create cost comparisons. I use published costs measured against a static fund value over one year.
The argument I would put to your method is how do you account for the TB at the end of the projection period in the ceding scheme? It's unreasonable to conclude that there won't be one.
Ultimately, for a cost comparison to be quantitively fit for purpose, all other elements of the equation (fund value, term, growth) must be equal.
Thanks Ben - interesting and I understand your point.
I suppose, it is worth arguing that the TB today is a known figure, against a future 'potential' TB which is unknown.
In an ideal world I would ditch off Selectapension and simply provide a 'like for like' cost comparison alongside all the other product/fund comparisons and benefits
Yes. I live in that world and it's much easier.
The problem is not the terminal bonus. It's having no flexibility in a compliance process.
First thing I did when I joined the IFA I currently work for was told him to bin the pension comparison tool.