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Smells like scandal

Many don't realise that they could be be losing half the value of their pension benefits, even with the introduction of a cap on exit charges

12 February 2016

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The chancellor recently announced that the treasury will end what many consider to be 'rip-off' exit charges for pensions. George Osborne stated:

'We've listened to the concerns and the newspaper campaigns that have been run and today we're announcing that we will change the law to place a duty on the Financial Conduct Authority to cap excessive early exit charges for pension savers. We're determined that people who've done the right thing and saved responsibly are able to access their pensions fairly.'

Naturally, the finer details will be critical, with the Financial Conduct Authority charged with capping, rather than abolishing, the exit fees. In addition, I understand that this will only be for those eligible to take their benefits. Younger pension scheme members simply looking to switch pension plans might not benefit from this announcement.

While some exit penalties might appear excessive, I am somewhat concerned about the chancellor effectively forcing these retrospective changes on an already under pressure UK financial services sector.

Given that pensions typically take many years or even decades before they are profitable for providers, retrospective changes of this type could act as a major disincentive for providers to invest in pensions in future.

This potentially comes at the worst possible time, just when provider investment is most needed to help deal with the impending auto-enrolment tsunami of demand; when hundreds of thousands of smaller employers put a pension scheme in place for their staff.

However, perhaps the biggest scandal in pensions today isn't so called rip-off charges or even pension scams; it's the implausibly low transfer values that final salary pension schemes continue to offer members looking to take advantage of the new pension freedoms.

Transfer values from final salary or defined benefit pension schemes are calculated as a Cash Equivalent Transfer Value (CETV).

The CETV produced by the scheme administrator is supposed to represent the pension fund value of the scheme member's retirement benefits at the time of the valuation, assuming the member is leaving pensionable service at that time.

Unfortunately, CETVs are almost invariably considerably lower that what I would consider the fair value of the final salary pension benefits being given up. This is for a variety of reasons, but some of the key ones are:

  • It assumes a high growth rate within the final salary scheme from now until retirement;

  • It takes no account of the guarantees offered by the employer and the pension protection fund underwriting the scheme, or that any transfer effectively switches all of the investment risk onto the member; and

  • It tends to assume higher annuity rates at retirement than are currently available in the market.


In my experience, CETVs can come out as roughly half of what I would consider the fair value of the final salary pension. Consequently, this could be considered as equivalent to a 50 per cent exit penalty.

Unfortunately, transfers of final salary schemes aren't generally looked at in this way, instead 'critical yields' are confusingly quoted. As a result many people won't realise that they could in effect be losing half the value of their pension benefits.

In view of the continued problem with CETVs and a seeming unwillingness from the government to acknowledge this issue, I would urge anyone considering a final salary transfer to exercise extreme caution and ensure that they understand the value of the benefits that they might be giving up. 

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser

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Pensions