CETV - CASH EQUIVALENT TRANSFER VALUE

Question 1

METHODS of calculating CETV

Answer 1

BEST ESTIMATE METHOD
Set by legislation
Calculate ICE and adjust figure
Produces minimum CETV that trustees can offer

ALTERNATIVE METHOD
Where trustees wish to pay higher amount

Question 2

CALCULATING CETV - 5 STEPS

Answer 2

STEP 1 - Calculate pension at date of leaving scheme

STEP 2 - Revalue the preserved pension to the schemes NPA

STEP 3 - Calculate the capital cost of buying the revalued pension at the schemes NPA

STEP 4 - Discount the cost back to the date of the calculation. This figure is known as the Initial Cash Equivalent (ICE)

STEP 5 - Make any adjustment to ICE ( for scheme underfunding, allowing for discretionary increases

Question 3

CETV rates key factors

INCREASES / DECREASES

Answer 3

CETV INCREASES IF

Revaluation and escalation rates rise
Annuity rates fall
Discount rates fall
Enhanced CETV exercise

CETV DECREASES IF

Revaluation and escalation INFLATION rates fall
Annuity rates increase
Discount rates increase
Enhanced CETV exercise no longer applies

Question 4

TRANSFER CLUB

How transfers are calculated

Answer 4

Members can transfer between Public Sector schemes

1. The transferring scheme values employees accrued benefits and produces CETV
2. The receiving scheme uses the same actuarial assumptions and converts the CETV into added years in the new scheme
3. This calculation takes into account differences in the NPA and the benefit structure of each scheme
4. As a result the added years credited in the receiving scheme could be different from that in the transferring scheme