It seems like the CETV has taken on a mythical like status these days with even clients paying much more attention to what they are and whether they are accurate. So what are they? What is contained in them and what importantly is left out?
I am old school and prefer separating the two transfer value methodologies into CETV and Cash Equivalent of Benefit (used when a pension is in payment) rather than the more modern Cash Equivalent (CE) cover all. Here I will concentrate on the CETV and look at CEBs another day.
A CETV represents the anticipated cost of providing the member’s benefits within the pension scheme. In the case of money purchase it is the contributions made plus investment returns. In the case of defined benefits, the CETV is a value determined on actuarial principles, which requires assumptions to be made about the future course of events affecting the scheme and the member’s benefits.
Here are a few important examples of what CETV can overlook.
1. CETVs can ignore discretionary benefits
2. Schemes can offer different benefits for active members and leavers
3. Active members lose the loyalty benefit of future salary increases
4. CETVs normally ignore the health of the individuals
Since 1 October 2008, it has been the responsibility of the trustees to choose the assumptions on which the calculation of CETVs is based. Previously, the calculation had to be certified by the scheme’s actuary as consistent with a professional technical standard known as GN11. This allows for a much greater range in outcomes than was previously the case as different actuaries will interpret and forecast differently.
Don’t forget that we have access to an express valuation service which can help to establish whether the CETV(s) you are working with are fair value.
So if you need a quick opinion today, why not get in touch on 01204 663904
