![\"Diamond](\"http:\/\/momentumpublishing.co.uk\/weknow0.co.uk\/wp\/wp-content\/uploads\/2013\/07\/Diamond-graph.png\")
<\/a>A couple of weeks ago, I had a session with Beaufort Consulting. They had been selected by the Phoenix Group to provide independent financial advice to members of the Pearl Group Staff Pension Scheme who had been offered an enhanced transfer value (ETV).<\/span><\/p>\nThe aim of an ETV is simple. The sponsors of the scheme are looking to reduce the uncertainty and cost (the ETV is normally considerably less than the cost of purchasing an annuity with an insurer to an equivalent level to the pension given up). I have been the actuary to schemes in the past where the sponsor has carried out such exercises and, beyond advising the trustees to press the sponsor for certain minimum standards (for example independent financial advice, communication of risks and making sure the security of the non-transferring members is maintained), it has been frustrating to watch members seeming to give up the security of their benefits in many cases with rather little to show for it. I was curious to experience the process from the member\u2019s perspective.<\/span><\/p>\n I had been warned by the Trustee Board of the Scheme that an exercise was going to be taking place in February. Then last month I received a transfer value quotation from the Phoenix Group, indicating that not only would the current reduction to transfer values of 10% be removed, but that an enhancement of a further 10% would be added. I had six weeks to register for advice with the Beaufort Group, and a further six weeks to accept the offer before it was withdrawn. I was directed to the modelling tools on Beaufort\u2019s website and my attention was drawn to the Code of Good Practice and the Pension Regulator\u2019s guidance on such offers. An \u201cimportant additional information\u201d booklet, in the form of questions and answers on the overall process, was also enclosed. From Beaufort consulting I received a client agreement, a key facts document and log in details for their website (referred to as the \u201cMember Advisory Platform\u201d or MAP).<\/span><\/p>\n Whew! So I went on the website and answered the 15 questions designed to assess my risk profile. I was interested to note, despite indicating that I tended to disagree with accepting the possibility of greater losses to achieve high investment growth and rating the amount of risk I had taken in the past as medium compared to other people, that I had been categorised as having a risk rating of medium\/high. The suggested asset allocation was 90% in equities and 10% in corporate bonds.<\/span><\/p>\n On the basis of this, a requirement to provide a 50% spouse pension and annual pension increases in line with CPI increases capped at 2.5%, and with no lump sum taken, the modeller told me that I had a 6 out of 10 chance of getting a higher income from the transfer at retirement (in 10 years\u2019 time at age 60). Taking out the spouse pension increased this to a 9 out of 10 chance. In fact, out of the high outcome, mid outcome and low outcome shown, only the low outcome led to a lower income from the transfer. The thick black line of certainty of the Scheme benefits was placed beside the alluring diamond of possibilities from the transfer (see diagram above). None of the financial assumptions or assumed cost of buying an annuity were spelt out. I decided this would benefit from further discussion and clicked to arrange an appointment. My slot for a telephone meeting with an adviser was quickly arranged and the afternoon arrived.<\/span><\/p>\n The adviser was very polite and unpushy. I explained my surprise at the outcome of the risk profiler, on the basis of which he agreed to reduce my profile risk level; from medium\/high to medium.<\/span><\/p>\n He explained that Beaufort were not incentivised to get people to transfer and that the same offer was being made to everyone more than five years from retirement.<\/span><\/p>\n I asked him what assumptions had been made in the modeller. This took a while to get a response to, during which time I got an interesting account of a stochastic process (this is where you let the various outcomes be chosen randomly but according to an underlying probability distribution, then run the model lots of times to show the relative likelihood of different results. Throwing dice lots of times is a very simple stochastic process). I persisted, saying that the darker area in the middle of their diamond must be based on an average level assumed for investment returns and annuity rates. The response, after a moment when I thought he was going to put the phone down on me due to some noise on the line that I couldn\u2019t hear, was that the assumptions were standard and he thought the low one was 5% pa. I felt that he was telling me all he knew about the modeller.<\/span><\/p>\n We moved on to what I thought of the strength of the Phoenix Group, what my preference was on death benefits, etc, before he ran a few modeller examples to illustrate how my income following the transfer would be greater until age 81 (all stochasticism had been abandoned at this stage).<\/span><\/p>\n