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Transfer values and current trends

16 May 2023

This article provides an update on recent reductions in transfer values from Defined Benefit (DB) pension schemes.

Pensions and the options you have can be complicated so let’s start with the basics about your Defined Benefit (DB) pension.

Your DB pension

The benefits you’ve built up in the DB Section of the United Utilities Pension Scheme (UUPS) or United Utilities PLC Group of the Electricity Supply Pension Scheme (ESPS) depend on your pensionable service (the service you’ve completed as a contributing member of the DB section) and your Final Pensionable Earnings. After you leave service, your pension will increase each year, in line with the pension scheme’s rules.

At retirement you’ll be able to take a one off tax free cash lump sum and your remaining pension will then be payable to you for life and is a guaranteed income.

The other option available to you is a Cash Equivalent Transfer Value (CETV), this means your benefits held in the UUPS/ESPS are transferred out to another pension arrangement. If you choose to do this, you will no longer be entitled to a pension (or other benefits) in the UUPS/ESPS.  Instead, you will receive whatever the new scheme provides in return for your transfer value.  The pension schemes recently started offering partial transfer values (where you transfer some of your pension away as a CETV and retain some pension in the Scheme – the same concepts in this article do still apply though).

How is a CETV calculated?

A CETV represents an estimate at a point in time of the amount of money needed to be set aside to provide pension benefits at retirement.

The CETV depends on a number of factors including assumptions about the future (which may vary on a daily basis) such as:

  • Your age and scheme’s retirement age
  • Life expectancy
  • The cost of living (both inflation and interest rates)
  • Investment returns

The assumptions are set by the pension scheme’s Trustees, based on the regulatory requirements and advice from the Scheme Actuary, and are reviewed by the Trustees from time to time. 

Fluctuations in Cash Equivalent Transfer Values (CETV)

CETVs are only guaranteed for a short period (3 months) and are impacted by changes in market conditions, so if you request transfer values periodically (say every few years) you may have seen these go up and down. Over the past few years, DB transfer values have generally seen an increase year on year, and were high compared to historical levels.

However, as a result of current market conditions, CETVs have fallen, in some cases, by as much as 30% when compared to a year ago – this is not only affecting United Utilities’ pension schemes, but the pension industry as a whole.  But it’s important to remember that the pension you have built up in the DB Sections remain the same and will not be reducing, it’s simply that the estimated cost (CETV) to provide these benefits is less. The recent reductions in transfer values have been mainly caused by increases to interest rates, which have happened since Autumn 2022.

The table below shows how some of the key assumptions affect CETVs:

Assumption How it affects the CETV
Expectations of future interest rates Lower expected future interest rates will increase the CETV.

Higher expected future rates will reduce the CETV.
Expectations of future inflation Lower expected future inflation will reduce the CETV.

Higher expected future inflation will increase the CETV.
Scheme’s expectation on asset returns

Lower expected asset returns will increase the CETV.

Higher expected asset returns will reduce the CETV.

This is because the higher investment return your transfer value is assumed to get in the future, the less is needed now to provide the same amount (and vice versa).
Members’ life expectancy (how long a member is expected to live) Shorter life expectancy will reduce the CETV Longer life expectancy will increase the CETV

 

The Trustees understand that this will be disappointing to members, particularly if you have received CETVs in previous years and have been planning for retirement, but the key driver is the UK economy, which impacts the whole of the pensions industry, and is therefore outside the control of the Trustees.  

The primary purpose of the schemes, is to provide a pension benefit from your retirement age and it should be noted that a transfer of benefits is simply an option provided by the Scheme.  DB retirement benefits (should you choose to take your DB benefits through the Scheme instead of transferring out) are unaffected by these circumstances and will not fluctuate with market conditions, like CETVs.

Please also note that past movements are not a guide to the future and you should speak to an independent financial advisor before making a decision as to whether to take a transfer value. Please see the Transfer out FAQ on the UU pensions website for further information.

Issued on behalf of the UU pensions team