Transfer values

Guidance

This guidance helps trustees of private sector occupational pension schemes providing defined benefits to understand the requirements for calculating transfer values. References are set out at the end of the guidance and are linked within the text

Issued: September 2008

Key points

This guidance helps trustees to understand the requirements for calculation of transfer values in defined benefit schemes, as of 1 October 2008.
The trustees' new responsibilities leave scope for trustee judgement in producing transfer values appropriate for their scheme. This guidance helps trustees in these areas of consideration.
It includes our views on good practice and outlines our expectations of standards the trustees should incorporate into fulfilling the requirements.
Scheme advisers and administrators will also need to consider this guidance in assisting their clients in developing practice and procedures that enable the production of transfer values which align to the new regime.

Introduction

1. We have produced this guidance to help trustees understand and fulfil their new statutory and scheme rule responsibilities in relation to transfer value matters.

2. As from 1 October 2008, it is the responsibility of the trustees to take the decisions on which the calculation of cash equivalent transfer values (CETVs) is based. Previously, the calculation had to be certified by the scheme's actuary as consistent with a professional technical standard.

3. Whilst the guidance is primarily aimed at trustees, it will also be relevant to actuaries and others involved with transfer values, such as scheme administrators. It is also likely to be of interest to employers.

4. Trustees may find it helpful to discuss the more technical aspects of this guidance with their actuary as part of their overall discussions on the assumptions to be adopted for calculating CETVs.

5. The guidance covers:

the calculation of CETVs in respect of defined benefits;
the calculation of other transfer values in respect of defined benefits which are not CETV as defined in legislation (including cash transfer sums); and
the calculation of defined benefits granted in exchange for a transfer-in.

6. The guidance does not cover money purchase CETVs.

7. This guidance must be read in conjunction with the legislation itself. It does not override the legislation.

The calculation of CETVs

Background

8. A CETV represents the expected cost of providing the member's benefits within the scheme. In the case of money purchase benefits, this is generally straightforward – it is the accumulated contributions made by and on behalf of the member together with investment returns. In the case of defined benefits, the CETV is a value determined on actuarial principles, which requires assumptions to be made about the future course of events affecting the scheme and the member's benefits.

9. In either case, but more often in relation to defined benefits, in certain circumstances the CETV as described in paragraph 8 may be reduced.

The cash equivalent (defined benefits)

10. The legislation provides for two methods for calculating CETVs:

a method based on a best estimate of the expected cost of providing the member's benefits in the scheme; and
an alternative method where trustees want to pay CETVs which are above the minimum amount.

The best estimate method for calculating CETVs

11. The legislation establishes a framework which provides for the calculation of an 'initial cash equivalent' (ICE) which is then adjusted if necessary to arrive at the final CETV available to the member to transfer. The ICE must place a value on the member's accrued benefits together with any options and discretionary benefits that the trustees decide should be included.

Options

12. Most defined benefit schemes give members some benefit options, usually at retirement, other than the 'standard' benefits. For the purpose of calculating CETVs, an option is something which can be exercised by the member without needing anyone else's consent (trustees or employer). Common options are:

to exchange some pension for a lump sum at retirement;
to begin taking pension earlier or later than normal pension age (which might be subject to a reduction or an increase, respectively, in the amount of pension);
to give up some pension in exchange for a higher dependant's pension on death.

13. Only those options which would increase the value of benefits may be included within the benefit for cash equivalent purposes under the best estimate method.
However, where including options in the calculation, trustees are not obliged to assume that the member will definitely select the option. They may allow for the chance that the member will not take up the option, which could be based on their views of the scheme's likely future experience informed by past experience of the proportion of members taking it up.

The trustees will need to take advice from the actuary over which options would increase the ICE. Two such options are considered further below.

The option to exchange (commute) some pension for a cash lump sum at retirement is very commonly taken up by members. However, unless the commutation terms are such as to increase the expected value of a member's benefits, commutation may not be included as an option within the ICE.
There may be the option to retire before normal pension age without the need for consent. If so, and the early retirement factors increase the value of the benefit, the legislation requires the trustees to include an allowance for early retirement within the benefits to be valued for ICE purposes.

14. Where an option (which would increase the value of the ICE) is included, trustees should not offset that by another option which on its own would reduce that ICE. For example, where an early retirement option is incorporated, trustees should not reduce the effect of that by assuming that early retiring members will commute pension unless the commutation terms would increase the ICE.

15. Options which require consent should be treated as discretions and dealt with as described below.

Discretionary benefits

16. Many schemes also have some benefits which are not automatic, but which can be awarded at the trustees' and/or the employer's discretion. Trustees must decide on whether, and if so to what extent, discretionary benefits are to be included within the benefits to be valued. In doing so, they must have regard to:

any established custom for awarding them; and
any consent requirements needed (which will usually involve the employer).

17. A typical discretionary benefit is the award of pension increases over and above what the rules of the scheme automatically provide; another is early retirement on favourable terms with consent. Once a discretionary benefit is awarded, it becomes part of a member's accrued benefit. Awarding discretionary benefits sometimes requires the consent of the sponsoring employer.

18. When considering the extent to which discretionary benefits are to be included, trustees should:

make a decision in relation to each discretionary benefit the trustees can provide under the scheme's rules;
understand the relevant scheme rule which provides for the award of the discretionary benefit in question, bearing in mind that they may need to take legal advice;
usually consult any person (usually the employer) whose consent is needed;
consider the past history and future intentions with regard to the award of the benefit, taking into account the relevant circumstances (for example, the scheme's funding) which influenced or could influence the award;
take into account any agreed policy relating to the award of the benefit; and
consider whether to reflect any allowance made in the scheme's funding plan (explicitly, or implicitly through the degree of prudence in the funding assumptions) for discretionary benefits, bearing in mind that they may need to take actuarial advice.

Best estimate

19. The assumptions must be chosen with the aim of leading to a best estimate of the ICE. This is a best estimate of the amount of money needed at the effective date of the calculation which, if invested by the scheme, would be just sufficient to provide the benefits. However, trustees should recognise that 'best estimate' is not a precise concept and they will often need to be pragmatic and accept choices which seem to them reasonable in the light of the information and advice they have obtained.

20. When deciding on the assumptions for this best estimate, and to put them in a position to make informed decisions, trustees must seek advice from their actuary.
They should discuss with their actuary:

whether a particular assumption is likely to be influenced by scheme specific, industry specific, and/or member specific factors. For example, assumptions about the likelihood of a member having a dependant will be influenced by the scheme rule on eligibility for dependants' pensions. And mortality assumptions may be influenced by, for example, the industry in which the employer operates and/or by geographical location (often used as a proxy for affluence);
when deciding on demographic assumptions (mortality rates, proportions with dependants, relative ages of dependants), the main characteristics of the scheme's membership which will inform the choice of assumptions, or; where the members of the scheme do not form a large enough group to allow demographic assumptions to be made, the characteristics of a wider population sharing similar characteristics to the members;
whether it would be appropriate to subdivide the scheme membership into groups with shared characteristics, such as those adopted for funding purposes, using objective criteria for the purpose of making certain assumptions;
relevant scheme, or external data from which average values can be deduced and trends observed. For example, when making an assumption about future improvements in longevity, trustees should discuss emerging trends from appropriate sources; and
expert opinions on the likelihood of past data remaining valid for the future. For example, economists' opinions on the likely future relationship between bond and equity returns could modify trustees' views based on an analysis of the historic record alone. Trustees may wish to consult their investment adviser on such issues.

Investment strategy

21. Trustees must have regard to their investment strategy when choosing assumptions. This includes the appropriate investment returns to be expected, which in turn will influence the choice of interest rates with which future expected cash flows are discounted. To inform decisions, trustees should:

discuss with their actuary the relevance of the scheme's funding plan as set out in the statement of funding principles (or any similar document where their scheme has not completed its first valuation under the funding regime of the Pensions Act 2004). For example, where a scheme's funding plan implicitly assumes that investments underpinning benefits change at or approaching retirement, it might be appropriate to take this into account in deriving discount rates; and
consider consulting their investment adviser on the financial landscape and its implications for choosing best estimate investment returns.

22. Assumptions as to investment returns which are used to derive the appropriate discount rates should be net of investment management fees and expenses.

Evidence base

23. Trustees should make evidence-based objective decisions in relation to matters that will have a material effect. Of course, evidence in the conventional sense is not available on the future. In this context what we mean by evidence is facts about the past, and opinions about the future based on those facts, which can be objectively used by the trustees to make judgements about the likely course of future events.
This evidence can take a variety of forms, including:

past history of investment returns from various asset classes and the relationships between them;
published mortality tables;
a scheme's own experience to the extent it is statistically reliable;
published statistics on demographic issues;
the opinions of recognised experts; and
the output of suitable stochastic models as advised by the scheme actuary.

Consistency with technical provisions

24. Assumptions for the calculation of technical provisions under the scheme funding regime of Part 3 of the Pensions Act 2004 must be chosen prudently. This often means taking a margin on the cautious side of best estimate. As the ICE and technical provision bases have different legal requirements, they will usually produce different results. However, the trustees should consider how the two bases relate to each other.

Special cases

25. When deciding on the allowances to be made for options and discretionary benefits and in choosing assumptions, trustees should ensure that they consider not only all the standard benefit structures within the scheme but also establish the process and principles to deal with any non-standard benefits which require separate consideration. This will avoid the need to revisit decisions should such a case become the subject of a transfer request. For example, a member may have a non-standard pension age or pension increases, which might require different treatment of early retirement options and an additional assumption respectively.

Reviewing assumptions

26. Trustees should monitor and review the appropriateness of the assumptions underlying the calculation of the ICE.

27. The frequency of monitoring and review should be influenced by considerations of practicality and cost. It would be reasonable for trustees always to review assumptions at the same time as a scheme funding valuation. On the other hand, reviews between valuations should be considered where the ICE is no longer within a reasonable margin of materiality of a best estimate. Trustees should instruct their actuary to alert them when this appears likely to be the case.

28. Circumstances which may justify an inter-valuation review include:

a significant change in investment policy;
a change in policy regarding the exercise of discretions;
becoming aware of significant experience differences in respect of demographic assumptions; and
when new standard mortality tables are published or other mortality information released.

29. Trustees will generally need to decide to incorporate some form of current market indices or other indicators into the calculation of the ICE with the aim of maintaining the best estimate level in the face of normal market movements. Nevertheless, trustees should continue to monitor whether the assumptions remain appropriate in changing market conditions.

The alternative method for calculating CETVs

30. Although the legislation sets a floor on transfer values, it also provides a basis for paying higher amounts. Trustees might set CETVs at a higher level than under the 'best estimate' basis where, for example:

the scheme's rules require it;
a shared cost scheme is in surplus on its funding basis;
the employer asks the trustees to do so; or
the trustees and the employer agree that it would be cost effective to adopt assumptions which are overall likely to produce higher CETVs than under best estimate, rather than to go into the level of detail necessary to ensure best estimate; or
the trustees consider it is reasonable to do so after consulting with the employer.

31. If the employer has asked the trustees to calculate CETVs at higher than 'best estimate' values, the trustees must still consider whether it is proper to do so. They may need to take legal and actuarial advice before deciding. One consideration for the trustees should be whether the scheme is fully funded in relation to the statutory funding objective and, if not, the pace at which any underfunding is due to be made good.

32. The precise way of determining alternative, higher, CETVs is a matter for the trustees. They will need to discuss it with their actuary. One possible method is to use one or more assumptions on the prudent side of best estimate but otherwise adopting the same approach to options and discretions as under the best estimate method. If this approach is adopted, the trustees will need to have gone through the process of deciding what options to allow for and discretionary benefits to take into account as for the best estimate method.Whatever approach is adopted, the trustees must be able to check that the resulting CETV is higher than it would be under the best estimate method.

33. Where the trustees decide to use an alternative method for calculating CETVs, they may take the view that paying them at full value would prejudice the security of remaining members because of the current state of funding of the scheme. In these circumstances, the trustees may commission an insufficiency report analogous to that under the best estimate method, but with liabilities calculated on the chosen assumptions. Where this is the case, particular care must be taken to ensure that any reduced CETVs on the alternative method are higher than CETVs on the best estimate method after allowing for any reduction justified by an insufficiency report on the best estimate basis.

Reducing cash equivalents to allow for underfunding

Insufficiency reports

34. In certain circumstances, trustees are permitted to offer transfer values which are less than the ICE under the best estimate method. One of the permitted reductions is to allow for the funding situation of the scheme. However, trustees may only reduce ICEs for this reason after obtaining an assessment by the actuary of the funding of the scheme using the transfer value assumptions and known as an 'insufficiency report'. Reductions to ICEs to take into account scheme funding must not exceed the maximum reduction identified in the insufficiency report.

35. However, although trustees may reduce ICEs to allow for underfunding, they are not obliged to do so. The fact that the actuary has prepared an insufficiency report on the instruction of the trustees should not in itself be taken to be a recommendation that cash equivalents should be reduced. Matters trustees should take into account when deciding to reduce ICEs include:

the degree of underfunding. The worse the funding position, the more necessary it may be to reduce ICEs to protect remaining members;
their assessment of the strength of the employer's covenant. The stronger the covenant, the less the trustees may feel it necessary to reduce transfers;
the structure of any recovery plan in place. The sooner a funding deficiency is being addressed, the less necessary reductions may be;
whether there are any contingent assets in place and if there are, their form. If contingent security is available to plug a funding gap if the employer were to become insolvent, reductions in transfer values may be unnecessary; and
whether the employer has undertaken to make a compensatory payment to the scheme each time a transfer is paid at an unreduced level.

36. Where an employer's covenant is judged to be strong, and any funding shortfall is being remedied over a reasonably short period, trustees should not normally reduce CETVs. On the other hand, where there are concerns about the employer's covenant over the term of an agreed recovery plan, trustees should consider reductions in order to provide similar security to transferring as to remaining members. Trustees should ask the actuary to advise on one or both of the following as appropriate:

the implications of not applying a reduction where one would be permitted;
the implications of applying a lesser reduction than would be permitted.

37. An insufficiency report (or a replacement insufficiency report following a scheme funding valuation) is not required unless the trustees wish to consider applying reductions to ICEs.

When to commission an insufficiency report

38. It will usually be convenient to commission an insufficiency report at the same time as, and with the same effective date as, a scheme funding valuation. Indeed, any reductions to initial cash equivalents being applied by virtue of an insufficiency report will have to cease as soon as a fresh funding valuation is received with a more recent date. If the trustees wish to continue reducing initial cash equivalents they may only do so after receiving a replacement insufficiency report with effective date no earlier than that of the new valuation (and the reductions must be based on that new insufficiency report).

39. If trustees wish to consider reducing cash equivalents because of underfunding before they have received their first scheme funding valuation, they must either commission an insufficiency report or, where appropriate, base reduction on a GN11 report (see paragraph 40).

40. A so-called GN11 report, which was prepared prior to 1 October 2008 under the legislation current at the time, may be treated as an insufficiency report at the discretion of the trustees. This is likely to be appropriate where either:

the actuary advises that in their opinion any resulting maximum reductions to initial cash equivalents would not be materially greater than those which would result from an insufficiency report; or
the trustees wish to apply a lesser reduction than the maximum permissible but still need to be comfortable that it is appropriate and the actuary advises that the GN11 report provides that comfort.

41. An insufficiency report may be commissioned by the trustees at any other time. Since funding deficiencies revealed at valuations must be addressed by recovery plans, the need for reductions in transfers because of poor funding should generally diminish with time. However, in some circumstances a new insufficiency report may be needed. These circumstances include:

when the employer's covenant appears to have weakened such that trustees wish to revisit a previous decision not to reduce transfers;
when economic conditions suggest that a deficiency may have arisen or worsened since the last valuation;
when for any other reason it appears that a deficiency may have arisen or worsened since the last valuation; and
following a change of assumptions consequent upon a review (see paragraph 26).

42. Since funding may improve between valuations, either as a result of a recovery plan or for other reasons, a reduction to a cash equivalent which is appropriate just after the last valuation may no longer be appropriate as time passes. The trustees should consider how their approach might be reviewed in such circumstances.

Wind-up expenses

43. When comparing assets with liabilities for the purpose of an insufficiency report, the regulations permit the actuary to make reasonable allowance for the estimated cost of winding up the scheme (and deducting this from the assets). Although this decision is one for the actuary, the trustees should expect the actuary to consult them.

Priority order allowance

44. Reductions to ICEs are permitted with the aim of retaining parity in benefit security between those transferring and those remaining in the scheme. Benefit security for remaining members is assessed by comparing the value placed on liabilities (using the assumptions chosen for calculating initial cash equivalents) with the value of scheme assets on the assumption that no further money would be available to the scheme. When a scheme winds up, assets are used to secure benefits in a certain order (the priority order). Broadly, the position since 6 April 2005 is that assets must first be used to secure benefits up to the level of PPF compensation. If there are any assets left, they are used to secure any remaining scheme benefits.

45. When preparing an insufficiency report, the regulations permit the actuary to allow for the different categories of benefit under the priority order. Whilst this is a decision for the actuary, trustees should expect the actuary to discuss the matter with them.

46. Trustees need to bear in mind that the objective of reductions in full cash equivalents is to protect the security of remaining members over the short term. If the scheme were to have to wind up without sufficient assets, members' benefits are protected in a certain priority order. Consequently, it should usually be assumed that the more equitable treatment is to take account of the priority order when preparing an insufficiency report, unless combining categories would not give rise to significantly different degrees of reduction in the initial cash equivalent for any member.

47. The regulations permit the actuary to make reasonable approximations when preparing an insufficiency report. This is particularly relevant when estimating the PPF compensation level, where absolute precision could involve considerable expense and complexity. The trustees should discuss with their actuary the nature of the approximations made.

CETVs for schemes in wind-up and in a PPF assessment period

Schemes in wind-up

48. The new legislation applies where the scheme is in wind-up, though a scheme's investment strategy is likely to differ markedly from what it would otherwise be, and this will be reflected in the best estimate investment assumptions.

49. Where the scheme is being wound up, cash equivalents cannot be reduced in accordance with an insufficiency report. Rather, they may be reduced to the extent necessary to comply with the legislative requirements for the allocation of assets on a wind-up. Many schemes in wind-up will not have sufficient assets to secure all benefits in full and in these circumstances the CETV will, in effect, represent the members' shares of the assets of the scheme taking into account:

the estimated future costs of completing the wind-up;
the cost of securing benefits with insurance companies;
the applicable priority order (which will depend on the date wind-up formally commenced);
the likely proceeds from the sale of scheme assets;
any likely payments from the employer; and
any contingency margin the trustees consider reasonable.

Schemes in a PPF assessment period

50. Schemes in a PPF assessment period are not normally permitted to pay transfer values, though there is no explicit exemption from the requirement to provide a CETV quotation (known as a statement of entitlement). However, unless the quotation is needed to comply with pension sharing legislation, it will usually be appropriate to inform inquiring members that as transfers are not permitted, the scheme will not be providing these quotations. We will not seek to take action where members have been kept informed.

Non-statutory transfers out and cash transfer sums

51. Some schemes permit transfers which are not covered by the cash equivalent legislation; for example, some transfers in respect of members who are close to retirement. Unless scheme rules specify how such transfer values must be calculated, the trustees must decide on their approach.

52. Since 6 April 2006, early leavers with between 3 months and 2 years of pension scheme service (and who do not qualify for a preserved benefit) must be provided with the option of a cash equivalent called a cash transfer sum (CTS). The legislation covering the calculation of CTSs broadly parallels that covering CETVs.

53. As a consequence of the legislation, the same basis should normally be adopted for the calculation of CTSs as for statutory cash equivalents. Normally, we would also expect the same approach for non-statutory transfer values. This is pragmatic and fair and also avoids any discontinuities in the amount of a transfer across an age or other threshold.

Transfers into schemes

54. There is no statutory obligation for a trust-based scheme to accept transfers-in and provide benefits in exchange. Some schemes do offer defined benefit transfer credits, typically in the form of 'added years' counting for benefits on the scheme's normal formula. Other schemes offer money purchase benefits in exchange for transfers, in which case no issues arise as to assumptions for determining benefits.

55. The calculation of a transfer credit will usually be addressed by the scheme's rules. These may give the trustees a decision-making role. In exercising this role the trustees should take into account the following principles:

from a transferring member's perspective, the transfer credit should be fair value for any transfer received;
a transfer credit should not be expected to prejudice the security of existing members' benefits; and
a transfer credit should not be expected to require additional funding from the employer in the long term unless agreed by the employer in advance.

56. Within these principles, the trustees will need to establish assumptions so that the transfer credit can be actuarially determined from the transfer value received. Choosing assumptions consistent with the transfer out basis will usually be appropriate. However, there is potential for a 'selection' effect in these cases in that it is likely that the option will be particularly attractive to those members who expect their pay to increase at higher than average rates. It could be appropriate for trustees to take this into account.

57. Although in general, assumptions should not vary between individual members, account may be taken of identifiable characteristics expected to have a bearing on the eventual cost of benefits.

58. Trustees should make it clear to potential transferring members what assumptions are being made in the calculation of the transfer credit offered. Individuals considering transferring into the scheme should also be advised to take their own financial advice.

Transfer out following a previous transfer-in

59. If a member who has been granted a defined benefit transfer credit subsequently leaves the receiving scheme and wishes to transfer out, the calculation of an appropriate CETV can be problematic. In these circumstances, the transfer value offered in respect of the previously transferred-in service can be lower, sometimes significantly so, than the original transfer-in received or than the value of the transferred-in service, particularly when the transfer credit was in the form of added years.

60. Trustees should discuss this issue with their actuary and decide how to deal with these members.

Practicalities, administrative expenses, presentation and pensions to former spouses or civil partners

Practicalities

61. In all but the smallest schemes, trustees are likely to find it convenient and cost effective for the scheme's administrator to calculate transfer values using instructions provided by the actuary. Trustees should discuss with the actuary and the administrator how best to ensure that calculations are carried out correctly. This might be achieved by the trustees asking the actuary to undertake sample checks on a range of cases. In addition, it would be good practice for trustees to have transfer values over a certain amount routinely checked.

62. Even where the scheme's administrator normally calculates transfer values, it may be more cost effective for the trustees to ask the actuary to undertake the calculations for cases involving non-standard benefits, or for sections of a scheme not expected to generate many transfer quotations.

Allowance for administrative expenses

63. Trustees are permitted to reduce an ICE under the best estimate method to reflect reasonable administrative costs associated with the transfer process. However, if they decide to do so they must offset against those costs any reasonable administrative savings for the scheme. The trustees must disclose any such reductions made when providing the statement of entitlement.

64. Administrative costs are limited to dealing with a typical transfer on the assumption it will go ahead. These costs can usually be estimated based on past experience of dealing with members transferring to a range of receiving schemes.

65. The administrative savings which must offset any costs will be the capitalised value of the expected cost of:

administering the deferred pension up to retirement;
dealing with a deferred member at retirement; and
administering the resulting pension and dependant's pension after retirement.

Presentation

66. When a cash equivalent quotation is issued to a deferred member of a defined benefit scheme by way of a statement of entitlement, trustees must alert the member to the fact that information about transfers that may assist the member in making a decision is available from:

transferring out of a defined benefit pension scheme - MoneyHelper
inducement offers (PDF, 135kb, 8 pages) - The Pensions Regulator
UK pension transfers - MoneyHelper

67. Our guidance on inducement exercises is primarily intended for trustees, employers and advisers but, where the quotation is being issued in conjunction with an inducement exercise, scheme members may also find it helpful.

68. It would be good practice for trustees to make available reasonable details of the scheme's relevant transfer value basis (including the underlying assumptions used and the treatment of options and discretionary benefits) on request from a member or a member's financial adviser.

69. Because benefits deriving from contracting out of the state second tier pension (GMP and post 6 April 1997 service) when transferred to a money purchase scheme are still subject to certain restrictions, trustees should ensure that the amount of the transfer relating to these benefits is identified.

Former spouses' or civil partners' pensions

70. Where relevant, this guidance will need to be considered in conjunction with legislation on pension sharing on divorce. It is recognised that this guidance does not outline the specific areas where considerations in this area should be made, nor does it attempt to do so. This is a specialist area where trustees should take the appropriate advice when considering these cases.

References

Para 1

statutory: See The Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008 (SI 2008/1050) and The Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008 (SI 2008/2450).

scheme rule: A scheme's governing documents (the trust deed and rules) may have provisions permitting or requiring trustees to offer transfers in circumstances not covered by the overriding statutory provisions of the Pension Schemes Act 1993. In addition, scheme rules will address transferring in to the scheme.

Para 30

shared cost scheme: is one where the members share the cost with the employer rather than the more usual type of scheme under which the members pay a fixed contribution with the employer paying the balance of the cost.

Para 31

statutory funding objective: See section 222 of the Pensions Act 2004 and paragraph 26 of our Code of practice 03: Funding defined benefits.

Para 34

insufficiency report: See regulations 7D(2) and 7E(4) and Schedule 1B of the Occupational Pension Schemes (Transfer Values) Regulations 1996 as amended with effect from 1 October 2008.

Para 35

Their form: See our guidance on the role of contingent assets in scheme funding'.

Para 36

recovery plan: A recovery plan must be put in place whenever a funding valuation reveals a shortfall. See our Code of practice 03: Funding defined benefits, paragraphs 99 to 108.

Para 39

scheme funding valuation: Under section 224 of the Pensions Act 200

Para 40

GN11 report: A GN11 report is a report by the actuary in accordance with section 4 of actuarial guidance note GN11 (adopted by the Board for Actuarial Standards on 6 April 2007 and withdrawn with effect from 30 September 2008).

Para 50

statement of entitlement: A statement of entitlement is the formal quotation of the available transfer value provided to a defined benefit member on request. See section 93A of the Pension Schemes Act 1993.

Para 52

CETVs: See sections 101AA to 101AI of the Pensions Schemes Act 1993 and the Occupational Pension Schemes (Early Leavers: Cash Transfer Sums and Contribution Refunds) Regulations 2006 (SI 2006/33) as amended.

Para 67

inducement exercises: An inducement exercise in this context refers to an exercise initiated by a scheme's sponsoring employer with the aim of encouraging eligible members to take a transfer out of the scheme by offering a cash payment or an enhancement to the normal transfer value.

Para 68

discretionary benefits: See Regulation 11(1) and Schedule 1 of The Occupational Pensions Schemes (Transfer Values) Regulations 1996. It is a legislative requirement to provide information on discretionary benefits included in an estimate of a cash equivalent.