Allocation of A SSAS Fund Value
Procedures and Notes
These notes have been
designed to be as simple as possible but, inevitably, the process is not
totally straightforward. It is suggested that you scan the notes first and then
read them in more detail, referring to the example at the same time.
These notes refer to the allocation of the ‘fund value’ because it is usually the value that is being allocated, not particular assets.
Section A. Data used in the calculations:
The
following items are used in the calculations behind the allocation of the fund
value between the members:
1.
Fund value at the beginning of the period (the
‘initial fund value’)
2.
Receipts during the period:
a)
Contributions (from the company or the member)
b)
Transfers from other pension schemes
3.
Payments made during the period:
a)
Transfers to other pension schemes
b)
Lump sum benefits
c)
Pension payments
d)
Death in service premiums (sometimes included)
4.
Fund value at the end of the period (the ‘final
fund value’)
For
items 1, 2 and 3, each member’s share of that amount is needed as well as the
total amount. For item 4, the total amount is known but each member’s share of
that amount will be the result of the exercise.
Items
2 and 3 are usually described as non-investment transactions i.e. they involve
transactions with parties external to the scheme itself. This distinguishes
them from purely investment transactions.
For
the avoidance of doubt, the following items are not used in the calculations:
1.
Interest on cash deposits or loans
2.
Rent from properties
3.
Dividends
4.
Tax reclaims
5.
Expenses (administration, consultancy and
investment related)
6.
Profits made on sale of assets
These items affect the total fund value at the end of the period and therefore the rate of investment return but individually they have no specific effect.
The steps involved in
the allocation are:
1.
A computer program calculates the interest rate
that needs to be applied to the total fund at the beginning of the period and
to the total of each transaction amount during the period to achieve the fund
at the end of the period.
2.
The program then applies the same rate of
interest to each member’s initial fund value and the member’s share of each
transaction, to find the member’s share at the end of the period.
The program takes into account the date entered for each transaction in the period. The source of returns does not matter, there is no distinction between interest, dividends, capital gains.
Section D. Example:
A scheme has 2 members and at the beginning of the year, 1st January 2002, the allocation of the fund value is:
£
Member A 125,000
Member B 475,000
Total fund value 600,000
In the year the following contributions are made for Member A:
Date Total Amount
31/03/2002 £45,000
30/09/2002 £10,000
31/12/2002 £25,000
In the year the following benefit payments are made for Member B:
Date Total Amount
24/08/2002 £115,000
09/09/2002 £30,000
The value of the common fund at the end of the year is £580,000.
The program calculates that the rate of investment return earned on the fund over the year (allowing for the payments in and out of the fund) was 7.684% p.a.
Applying this rate of interest to each member’s share of the payments gives the allocation of the fund value at 31st December 2002:
£
Member A 217,348
Member B 362,652
Total fund value 580,000
For member A, the total of the fund value at the start of the year and the contributions received in the year was £205,000. The share of investment income and profits allocated to Member A was therefore £12,348 but it is not possible to say how much was derived from any particular asset.
The
above example can be used to illustrate the effect of allocating the fund value
between the members half way through the year, as well as at the end of the
year.
a)
Rate of return is equal for both halves of the
year:
If
the fund value on 30th June 2002 were to be £668,115, then the annualised
investment return for the 2 halves of the year would be 7.673% p.a. and 7.697%
p.a. respectively. If the fund value were to be allocated half way through the
year and at the end of the year, the allocation at 31st December 2002 would be:
Fund Value
At 31/12/2002 ‘Error’
Member A 217,350 2
Member B 362,650 -2
Total fund value 580,000
The
‘Error’ column represents the difference that has arisen due to the fund value
being allocated twice over the year rather than once.
As
there was little difference between the rates of return for the 2 halves of the
year, there is little difference in the allocation of the fund value at the
year end.
b)
Rate of return is very different for the 2
halves of the year:
If the fund value on
30th June 2002 was £700,000 then the annualised investment return for the 2
halves of the year would have been 18.737% p.a. and –3.248% p.a. respectively.
If the fund value were to be allocated half way through the year and at the end
of the year, the allocation at 31st December 2002 would be:
Fund Value
At 31/12/2002 ‘Error’
Member A 214,912 2,436
Member B 365,088 -2,436
Total fund value 580,000
The
significant difference between the rates of return for the 2 halves of the year
has produced a significant difference in the allocation of the fund value at
the year end, as shown by the ‘Error’ column, even though the fund value at the
end of year has not changed. A difference of £31,885 (or 4.8%) in the fund
value at 30th June 2002 distorts the allocation for member A by
1.1%.
a) Accuracy of Valuations
Valuations should be
as accurate as possible. It is not correct to say that as long as the asset
valuations are accurate when a member transfers out of the scheme, the
valuations at intermediate dates do not need to be precise. As the example
shows, the values of the assets at the intermediate dates do have an effect on
the allocation of the fund at later dates.
Debtors and creditors should be taken into account if they are significant. For example, any arrears of rent or loan interest should be included as an asset.
Any
significant accruals or prepayments should be taken into account.
In some situations the trustees may consider that it is not cost effective to include debtors or accruals.
b) Frequency of Valuations
The method
assumes that the rate of investment return is the same for the whole of the
period (over the whole year, for example). It would be theoretically more
correct to value the assets more regularly and use a different rate of return
for each month. However, this causes more work and would be reflected in
additional fees. Similarly the trustees may consider that it is not
cost effective or appropriate to value the assets and allocate the fund value
more frequently.
It is best to allocate the fund value on a regular basis e.g. monthly or annually, rather than at random intervals.
Sometimes it is suggested that ‘interim’ allocations of the fund value are carried out in the middle of a year but they are ignored when the ‘accurate’ allocation is assessed. This approach should be used with caution because members may assume that the year end fund should be consistent with the ‘interim’ half year allocation.
c) Property
The values of some assets cannot be determined precisely e.g. property. However, it is important to value them as reasonably as possible to avoid distorting the allocation of the fund. If a property is not revalued for some years and then a large revaluation is applied, then the rate of investment return in the final year is increased above its ‘true’ value and the rate of return in earlier years is reduced below the ‘true’ values. This can distort the amount allocated to each member.
On the other hand, if a significant percentage of the scheme’s assets are in property then allocating the fund value more frequently than annually may be spurious because the true value of the property is not known each month.
d) With Profits.
Investments in with-profits funds can also complicate the allocation of the fund value. It could be argued that the fairest way to value the investment each time an allocation of the fund value is needed is to use the transfer value (allowing for any terminal bonus and any market value adjustment). Alternatively, it may be proposed to adopt a different method such as making some allowance for terminal bonus and no allowance for any market value adjustment factors. It is important that a consistent approach is used for consecutive valuations and if the method has to be changed then consideration is given to the distortions that can be caused. For example, if market value adjustment factors are used when a member leaves the scheme and part of the investment has to be sold, distortions can occur. In general the full details of the method should be determined before the approach is adopted, rather than trying to obtain consensus agreement when issues develop.
e) Trustees’ decision.
When we are asked to allocate the fund value, we will assume that the valuation of the assets is as accurate as the trustees have decided is appropriate and that the frequency of the valuations is considered to be appropriate.
Section G. Other
Methods
There are other methods of allocating the fund value between members.
Having separate investment portfolios and separate bank accounts works very well as long as assets are not shared between members. There is never any need to calculate the allocation of the fund – it is simply a case of totalling the value of the assets in each member’s portfolio.
Sometimes it is proposed to share some of the assets, e.g. allocating a certain percentage of one or more assets to each member. These methods can be very easy to operate if there are no changes in assets and if there are no contributions and benefit payments. However, they can become very complicated if there are switches in the investments or regular transactions. If this type of approach is to be adopted, it is recommended that specific written rules are produced so that all trustees, members and scheme advisers agree on the rules and the potential pitfalls, inaccuracies and distortions are understood.
To
reduce the amount of data, transactions will usually be grouped for the period
under review or for calendar years. For example, it may be assumed that all
contributions are paid half way through each year (if they are actually paid
monthly) or at the end of each year. Similarly, monthly pension payments may be
assumed to be paid half way through the year.
Sometimes
it will be assumed that premiums to insure death benefits are paid by the
overall fund and sometimes it will be assumed that the premiums for each member
are deducted from each member’s share of the fund. If the trustees prefer one
method or the other then this should be made clear when the advice is
requested.