Transfer Value
Dear Ballyphilip,
The reasonableness of the transfer value is very much in the eye of the beholder. If you have a deferred benefit payable from say 65 based on service to date and current salary, you really have two options:
1) take the deferred benefit, which will be indexed at the lesser of CPI and 4% p.a. from date of leaving to your actual retirement (to maintain its real value)
2) take the transfer value and invest it in a new (defined contribution ) arrangement
The question as to whether the transfer value on offer is reasonable, well that depends. To test its reasonableness you could go through the following calculation:
A) calculate your current deferred benefit
b) index this figure at say 3% p.a. to your retirement age
c) estimate what the capital cost would be to buy that annuity at retirement based say on current annuity rates (this will depend on whether the deferred pension has a spouses pension attaching and whether the pension will be indexed in retirement)
d) estimate what rate of return you would need to earn on the transfer value to arrive at the same capital sum on retirement
e) do you think that this rate of return is reasonable?
So for example, if the rate of return required on the transfer value is say 5% p.a., then one might conclude that over time this is a reasonable bet. However if the rate of return required was say 9% p.a., then one might be inclined to opt for the deferred benefit.
The difficulty even with this relatively simple calculation is that it is very sensitive to the assumptions you make. You could ask your Trustees as to the basis for the transfer value calculations and either take a personal view or seek an independent view. In my experience the transfer values of offer tend to be "fair", since most actuaries adopt broadly similar bases for the calculation.
Remember, forecasting is always difficult especially when its about the future.