A (someone who has left the scheme with benefits earned but not yet drawn) writes to the scheme: "What is my pension worth if I take it to another pension scheme?" Answering that question, the or CETV, is one of the calculations that fills a pensions graduate's first year.
The statutory right
of a scheme generally have a statutory right, under the Pension Schemes Act 1993, to a if they are more than one year from their (the age the scheme's rules set for drawing the pension unreduced, 65 for the member below). Two deadlines shape the admin around it:
- trustees must provide the quotation within 3 months of the request; and
- the quoted figure is then guaranteed for 3 months from its guarantee date, which is the date the calculation is made rather than the date the letter lands. Markets can move inside those three months and the scheme still pays the figure it quoted, so that risk sits with the scheme, not the member.
Members leave jobs all the time, so the requests keep coming, and each one starts a statutory clock. That queue of deadline-bound quotations is why graduates get this work early. You run the arithmetic; the basis you run it on is set on the 's advice, the decision to pay belongs to the trustees, and every calculation is peer-checked before it goes out.
What a CETV is
The is not "what the pension is worth" in any absolute sense. The statutory minimum is the trustees' of the expected cost of providing the member's benefits in the scheme.
"Best estimate" puts it alongside the other numbers from module three:
- The funding basis is deliberately prudent, so sit above a best estimate.
- The basis reflects an insurer's pricing and is usually the most expensive of all.
- The is a best estimate, deliberately not prudent, so it normally sits below the figure and far below cost.
Why the softest of the three? Because the cash comes out of the collective fund. There is no pot with this member's name on it, so a transfer is paid from the assets backing everybody else's benefits, and a leaver paid on the prudent funding basis would walk away with more than their promise is expected to cost, at the expense of the members who stay.
It is also a clean break. Once the transfer is paid, the scheme owes that member nothing, and the and on those benefits stop being the scheme's. Where the transfer goes into a pot they become the member's; where it goes to another scheme they pass to that scheme instead.
Trustees may choose to pay more than the minimum. And if the scheme is underfunded, transfer values can be reduced, but only after the produces an , and by no more than that report supports.
The calculation, step by step
A simplified scaffold: good for seeing the moving parts, not the full statutory method. Take this member:
| Input | Value |
|---|---|
| Age now | 45 |
| Deferred pension, payable from 65 | £10,000 a year |
| Revaluation in deferment | 2.5% a year |
| at 65 | 20 |
| 5% a year |
Step 1: revalue. A deferred pension does not sit still while it waits: it is increased each year between leaving and retirement, broadly in line with prices and subject to a statutory cap. That is revaluation in deferment, and 2.5% is the cap for benefits earned since April 2009. So the £10,000 grows over the 20 years to pension age: 10,000 × 1.025 to the power 20 ≈ £16,386.16 a year.
Step 2: capitalise. The prices a pension for life: each £1 a year payable from 65 costs £20 of capital at 65. The 20 is not just interest: mortality sits inside it, along with any increases the pension gets once in payment, which is why a cannot be rebuilt out of compound interest alone. Capital needed at 65: 16,386.16 × 20 ≈ £327,723.
Step 3: discount. That is money needed in 20 years' time. Discount back at 5%: 327,723 divided by 1.05 to the power 20 ≈ £123,515.
Three assumptions drive that answer, and the is the one to watch.
How much the rate moves it
Now leave the member exactly as they are and move only the :
| 5% | £123,515 |
| 4% | £149,569 |
| 3% | £181,452 |
A single percentage point is worth £26,000 to this member, and two points are worth nearly £58,000. Nothing about the promise moved.
The machinery is compounding. Over 20 years, taking a percentage point off the rate multiplies the answer by (1.05 ÷ 1.04) to the power 20, about 1.21: one point on one assumption, a fifth of the quote.
One simplification: module two built the out of a as well, so on a real basis review the 20 would move too and the swing would be larger still. Holding it at 20 isolates the pre-retirement , the half you can run by hand.
Lower , higher : the sensitivity you met valuing whole schemes, applied to one member. Most applicants can define a . Being able to say what moves it, and roughly by how much, is what sets you apart.
The guardrails
A converts a guaranteed income into a lump sum a member can move, and lose. So the transfer comes wrapped in protections:
- Advice above £30,000. Members with safeguarded benefits (benefits carrying a guarantee, which is what a pension is) worth more than £30,000 must by law take regulated financial advice before transferring out to a DC arrangement, and the trustees must check that they have before paying. The member above quotes at £123,515, four times the threshold, so it bites on most DB transfers, not just the large ones.
- A presumption of unsuitability. The Financial Conduct Authority's guidance for advisers starts from the position that a DB transfer is unsuitable unless clearly demonstrated to be in the client's best interests.
- Scam checks. Since 2021, trustees must check the statutory transfer conditions (the "red and amber flag" regime) before paying a transfer. An amber flag means the member must first take scam guidance from MoneyHelper, the government's free guidance service; a red flag means the trustees must refuse the transfer.
The Pensions Regulator (TPR) oversees the trustees paying the transfer; the regulates the advisers recommending (or refusing to recommend) it.
Prove it
Reproduce the number the way a checker would, without looking back at the steps.
Work it out
A deferred member aged 47 has a pension of £12,000 a year payable from age 65, revalued at 2.5% a year in deferment. The annuity factor at 65 is 21 and the discount rate is 4.5% a year. Calculate the CETV to the nearest pound.