M-Plan members always have individual "pension pot"s that they accumulate in order to eventually buy a pension.  Similarly, the pension entitlement that other members in other plans have earned can, up until the time the member takes a pension, be converted to a Cash Equivalent Transfer Value (CETV) in pounds.  The majority of such members will not care about this because they simply take a pension (either when they retire from IBM or deferred from when they left IBM).   Those members are unaffected by their CETV, they have just a pension (and an optional lump sum).

However, some people will want to move their pension from IBM to their new company when they change jobs away from IBM.  The trust for the new company takes the CETV as cash and the member immediately gets some accrued pension benefit in the new company trust.

Also, some people will want to take the CETV into a personal pension plan, perhaps because they doubt IBM's long term willingness/ability to support the scheme, or they think they can do better if they have closer control over the stock market investments made.

So members should understand about transfer values, even if only so that they can feel that their decision not to do anything that involves a transfer value is an informed decision.  There is some difficulty in understanding because although Pension Services will tell you what your CETV currently is they won't help much with understanding why the amount wanders.  If you ask you will get something like "All transfer values decreased in between 2002 and 2003 due to changes in the transfer value assumptions, and market trends, since then the value has increased although there are no guarantees that they will continue to do so. In general the transfer value will tend to increase as the person gets older due to less time to be invested before the expectation of taking the benefits, but again if the markets change the value could go up or down."   Does that help?

One would expect the CETV to be a measure of the anticipated pension earned, so a simple situation to consider would be the CETV for a deferred pension.

Most final salary type deferred pensions are increased over the period between the end of the member's pensionable service for IBM UK and the start of their pension payments, to match inflation up to 5% p.a.  This is a regulated minimum uplift of the amount of pension entitlement established at the end of the pensionable service.   (For exceptions see "Deferral made long ago")  This simple chart shows how somebody opting for a deferred pension of £6000 p.a., in 1994, would get a pension of nearly £8000 on retirement in 2005 although the value in terms of what the pension would buy (according to the Retail Prices Index) remained the same.

Over the same period the transfer value will vary.  We can plot with adjustment for inflation,  so the values are in 2005 pounds.  If we also plot the level of funding of our final salary scheme (that is the ratio of the assets to the liabilities) on that chart we see a strong correlation - when the funding is poor, the transfer values are poor.  This does not necessarily mean the transfer values are calculated on that premise, but it does mean that the algorithms and parameters chosen by the trustees and actuary have that effect.

We can also plot the ratio of CETV to pension entitlement for this typical individual in comparison with the funding level.  As you would expect, there is a correlation in the same way as there was in the previous chart - the regulations lead to a smooth progression in the pension, while the trustees and the actuary create the volatility in the CETV by their choice of algorithms and parameters.  The actual ratio of CETV to pension p.a. is not a surprise either.  It is in the 10 to 14 range for this typical example in recent years.  On retirement, a member has the opportunity to sacrifice some pension in order to get a lump sum.  The amount of the lump sum that can be taken is determined by the scheme deeds and the amount sacrificed has to be certified as "reasonable" by the actuary.  In practice, the lump sum is typically 12 times the annual pension sacrificed.

You may well find the variations of CETV counter-intuitive.  If somebody has left IBM, and has a regulated deferred pension, why should the value of it correlate with the current funding level, which is in the control of the employer (and the trustees by recent legislation)?

The position arises because of two principles the deciders adopt:

a) The member does not have to be provided with enough cash to buy the pension he has earned from a pension provider - he only has to be provided with what the trust thinks it would have cost to provide the pension if the trust provided it.  (Or alternatively enough for the member to eventually buy the pension after making successful investments.)

b) The stock market is a better place to put money when it is performing badly.  In predicting the cost of the eventual pension, they assume a high rate of return on investment and hence a low transfer value.  They assume that the stock market always returns to its trend line eventually so when it does worse than usual that is an indication that it is about to do better than usual in future.

You might think these dubious principles, even perverse, but they are the historical reason for transfer value volatility.  Some actuaries have had doubts (also this) and there are plans for achieving fairer values.

On top of the effect of calculating a low CETV, that CETV is not always delivered in full.  The deciders may argue that the result of the calculation is the value for the normal case and that providing that amount when the fund has a deficit will make the deficit position worse for the remaining members - so the CETV gets reduced further.  This is an unreasonable argument if you believe that the company takes the risk in a DB scheme so the remaining members are no worse off and will get their promised pensions, but the Regulator allows the argument.

In summary:

The transfer value is a poor indicator of the value of the pension you have earned.

For most people it will turn out to be relevant only to put your decisions not to use it into perspective.

In practice it is correlated with the funding level of the scheme.  The larger the deficit, the poorer the transfer value is likely to be.

Members do not get an explanation of the rules and calculations for transfer values that is sufficient to allow informed decisions, or accuracy checks.

The rules and calculations may soon be partially improved.      

There are a number of simplifications and approximations in the account above, for example because members are only entitled to know the funding level at intervals of three years.  If there are members who have been tracking their transfer values over many years they might choose to tell AMIPP, so that broader based data can be used. 

As with all this website, none of the above is financial advice.  You should not act on anything without first validating it for yourself.