ETVs to bounce back in favour as bond yields fall

Enhanced transfer value (ETV) exercises are firmly back on the corporate agenda as corporate bond yields fall and could even become a profit source as they did before the credit crunch says Hymans Robertson. ETV exercises, where pension scheme members are offered enhanced terms if they opt to transfer their benefits out of the company scheme, are one of only a handful of approaches open to companies looking to reduce their historic defined benefit pension liabilities, but have been put on hold because the unusual market conditions of the last 18 months mean they would have caused a hit to the profit and loss account, says the firm.

James Mullins, senior actuarial consultant at Hymans Robertson, says take-up of the solution has been low because corporate bond yields have been high, artificially depressing pension liabilities in company accounts. To be attractive to a member, an enhanced value offer over the last 18 months needed to be higher than its liability shown on the company’s balance sheet, he says.

“Recent dramatic changes in bond yields have put enhanced transfer values (ETV) firmly back on the corporate agenda. But ETV exercises will now look more attractive to companies because corporate bond yields have fallen sharply in recent weeks and this trend could continue. This means thatpension liabilities shown on company balance sheets will rise dramatically, and this will have a double impact. Firstly, FDs will be faced with significant scheme accounting deficits – no longer masked by high bond yields – and, therefore, will have a greater desire to tackle the legacy pension problem.

“Secondly, ETV offers will now be much closer to the value shown in company accounts and so these exercises will no longer result in major hits to the P & L account. If corporate bond yields fall further, they could even become an accounting profit source as was the case before the credit crisis.”