What’s in a Critical Yield? Heather Dunne ACII FPFS Chartered Financial Planner ©HDC 25 th April 2016 For Professional Advisers Only HDC is a Trading Style of Heather Dunne Consulting Limited. Registered in England and Wales. Company No: Registered office: Units 4-6, Burnt House Farm Business Park, Bedlam Lane, Smarden, Ashford, Kent TN27 8PG

1.Calculation of a Transfer Value 2.Calculation of a Critical Yield 3.Supplementary Critical Yields 4.Examples Critical Yields - Agenda 2

Transfer Value 3 What is a Transfer Value? “Best Estimate” of cost to the scheme of providing benefits

Deferred Benefit Benefit fixed at Date of Leaving Revalued to retirement RPI/CPI/5%/2.5% PPF/GMP Revaluation 4

5 Pension Due at NRA Pension Due at DOL Pension Due at NRA Revaluation at 2.3% Pension Due at NRA Revaluation at 2.9%

Cost of Pension What effects the cost of a pension? Benefits included: Spouse, Dependants, Children Indexation – level applicable Individual Circumstances Marital Status, Mortality, Morbidity, Gender How cost is met Mortality Gain Underlying Investments 6

What Discount Rate? 7 CETV Pension Due at DOL Capital Cost of Pension Due at NRA Revaluation Pension Due at NRA Conversion ????

8 CETV Adjustment Pension Due at DOL Capital Cost of Pension Due at NRA Revaluation Pension Due at NRA Conversion Discount Cash Equivalent Transfer Value DEFICITS

What is a Critical Yield? The growth required to match the benefits due from the ceding scheme at the scheme NRA So why isn’t the Critical Yield the same as the Discount Rate? 9

TVAS Assumptions 10 ASSUMPTIONS This report uses various assumptions which are prescribed by the Industry’s Regulators and are subject to regular review. Valuing Scheme Benefits The Annuity Interest Rate is the annual rate of investment return used in calculating the Annuity Rates for the evaluation of scheme benefits and for converting the projected fund in the individual plan into a pension. The individual plan's pension amount assumes payments are made monthly in advance. The mortality rates used to determine the annuity are based on the CMI tables PCMA00 and PCFA00 including mortality of the male and female annual mortality projections models in equal parts. No allowance is made in these annuity rates for enhanced or ill health annuities.

TVAS Assumptions 11

TVAS Assumptions April 2016 – Reviewed Monthly 12 Pre RetirementPost Retirement AIRN/A2.1% RPI2.5%3.55% CPI2.0%3.03% Mortality CMI Tables PCA00 for M&F, plus adjustments

13 Calculation of the Critical Yield Pension Due at DOL Capital Cost of Pension Due at NRA Scheme Revaluation TVAS Pension Due at NRA conversion Discount Cash Equivalent Transfer Value TVAS Revaluation Scheme Pension Due at NRA Annuity Cost Capital Cost of Pension Due at NRA Critical Yield

For Annuity Purchase Currently Classified as Joint Life Single Life Normal Retirement Age Intended Retirement Age Pension Protection Fund 14

Critical Yield % -2.1%

Critical Yield % 4.0%

Critical Yield % -1.3%

Critical Yield % 0.2%

Cash Flow Modelling Full Scheme Pension UFPLS – Phased Drawdown Drawdown Cash & Reduced Scheme Pension UFPLS – Phased Drawdown Drawdown 19

UFPLS Full Pension no TFC 20

Keith CETV v CY Revaluation RPI 2.9% pre retirement 2.8% post Higher than TVAS 2.5% Pension calculated Scheme £8,507 TVAS £8,418 21

Keith Capital cost at NRA Scheme £200,807 TVAS£305,901 Differential very significant Both capital costs calculated – Scheme based on TV and discount rate, TVAS based on PP projection and pensions 22

23 Calculation of the Critical Yield Pension Due at DOL £6, Cost of Pension at NRA £305K Scheme Revaluation 2.9%pa TVAS Pension at NRA £8,418 conversion Discount ?? Cash Equivalent Transfer Value TVAS Revaluation 2.5% pa Scheme Pension at NRA £8,507 Annuity Cost Capital Cost of Pension Due at NRA £200K Critical Yield ?? So what was the Critical Yield ? 13.2% So what was the Discount Rate ? 5.35%

Keith’s Critical Yields KeithPensionCash Joint Life13.2%11.8% Single Level4.6%3.8% PPF9%8.2% 24

TVAS - Data 25 Data required for TVAS

TVAS - Data 26

TVAS - Data 27

TVAS - Data 28

TVAS - Data 29

Single % 5.3%

Wife Similar Age % 6.2%

Wife ten years younger % 7.3%

Wife ten years older % 5.6%

Comparative Critical Yields JuliaChristina Critical Yield8.7%17.7% Single Level3.5% -17.3% PPF0.1% -13.6% 34

No Late Retirement 35 TVAS results when no benefits from scheme

No Late Retirement 36

No Scheme Benefits 37

What Is In A Critical Yield?

IMPORTANT This presentation and accompanying notes have been prepared for the benefit of the delegates only and are designed as part of this seminar. They should not be used for giving specific advice to clients. No responsibility can be accepted by Heather Dunne or HDC, for any loss occasioned by a person acting or refraining from acting on the basis of the seminar notes. Any statements made by the presenter relating to client matters are her opinions or suggestions and must not be interpreted as advice. 39