Extract from a Financial Times article, 27 Jan 2007:
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Out of the frying pan into low transfer value

By Sharlene Goff

Published: January 27 2007 02:00 | Last updated: January 27 2007 02:00

Any employees considering leaving their company's final salary pension scheme might want to think again now the
government has overruled industry proposals to offer scheme members more attractive transfer values.

The Department for Work and Pensions (DWP) ruled last week that employers offering lump sum payments to members wishing
to transfer out of defined benefit pension schemes - which promise a set level of income in retirement - will not be
required to give cash payouts large enough to buy the equivalent level of benefits with a private insurer.

Actuaries had been lobbying for employers to base transfer values on what the pension was actually worth, rather than
the current system of calculating transfer values using often racy investment performance assumptions.

But the DWP has opted to stick with the existing method to avert further pressure on already underfunded defined benefit
schemes.

Andrew Tully, marketing technical manager at Standard Life, says: "The DWP has decided to look at the financial security
of these schemes rather than the benefits for individual members. It does not want to kill off these schemes entirely."

Defined benefit schemes pay out a fixed income at retirement, based on the member's salary and length of service. Many
have recently been forced to close the doors to new - and even existing - members as higher life expectancy and lower
than anticipated returns have left schemes strugglingto honour their benefitpromises.

Employers had been concerned that if they had to pay out transfer values reflecting the full worth of the final salary
pension promise, a flood of members could have abandoned final salary schemes, leaving a shrinking pot to accommodate
remaining members.

Transfer values on final salary pensions are essentially the present day cash value of deferred retirement income
promises made by employers. They can vary wildly depending on the assumptions that trustees use to calculate them.

The most important assumptions are life expectancy and the "discount factor". The discount factor works out the current
cost of future benefits based onforecast investment returns. The higher the assumed growth rate, the lower transfer
value the scheme will offer. This is the crux of the problem for members wanting to move funds.

Trustees have had - and will continue to have under the new rules announced last week - the power to set the assumptions
used to calculate transfer values. Many may be overestimating future growth (some are assuming returns in double digits)
and are therefore offering low transfer values to members.

A number of actuaries had proposed to introduce a prescribed set of assumptions that would have been more favourable to
members. But under the new DWP proposals, companies will still have significant leeway to work out transfer values in
the scheme's favour.

Tully explains: "Transfer values will continue to be poor value for members. It will be difficult to match the benefit
anywhere else."
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