Cash equivalent transfer value (CETV)
Transfer value must be offered to an early leaver with at least 3 months’ service
The CETV allows members to move the cash lump sum into a new pension arrangement.
The process to calculate the CETV is:
- Calculate member’s preserved pension at date of leaving
- Revalue preserved pension up to scheme’s normal retirement age
- Calculate capital cost of buying re-valued pension at normal pension age, using an annuity rate assumption
- Discount the capital cost at retirement to the present to provide current capital value, using a discount rate set by the actuary.
If the scheme is underfunded the trustees may reduce a transfer value below ‘best estimate’
The calculation of the CETV is very sensitive to assumptions used and these are set by the scheme. Lower discount or annuity rates will increase the CETV, while higher annuity rates or discount rates will reduce the CETV.
If the revaluation rate is lower, the CETV is lower and vice versa.
Question - Use Your Note Taker To Jot Down Ideas / Calculations
Question for Chapter 4 – Section 7 – Part 3
Which of the following changes in assumptions would cause a cash equivalent transfer value to increase?
a) An increase in revaluation rates.
b) An increase in annuity rates.
c) An increase in discount rates.
A – Yes: higher revaluation rates would lead to a higher preserved pension at NRA and consequently a higher CETV.
B – No: higher annuity rates would mean that a lower lump sum would be required at NRA to provide the same level of preserved pension and consequently the CETV would be lower.
C – No: higher discount rates would require a lower lump sum in today’s terms and therefore a lower CETV.