# DB pension is being wound up



## spalpeeno (14 Aug 2017)

As a deferred member of a DB scheme (took voluntary redundancy 2 years ago) I have been told, by a representative of the trustees, the scheme is now wound up because the company no longer wants to contribute. The scheme apparently is in surplus of the statutory funding standard with an overall funding level of 125%. The fund is to be distributed to members after determining the transfer payment. What exactly does this mean? Must I now 'pick' a new fund to put whatever meagre amount (the company has previous history of mismanaging the fund) is decided upon? I have also some funds in AVCs and am told this is available to transfer in addition to the transfer value payment. How is this transfer value determined? Retirement age under the scheme is 65 - I'm now 57. It seems there's little I or former colleagues can do, or is there? Are there key questions which need to be asked? I'm in the dark and any advice is welcome.


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## Steven Barrett (14 Aug 2017)

Your pension is now going from defined benefit to defined contribution and the money will be transferred into a policy in your own name. 

If the fund is in surplus, that is good, meaning you won't get less than the "transfer value" of the fund. The problem is how the transfer value is calculated. It uses completely unrealistic assumptions to come up with a figure that is supposed to provide you with the benefit that you are giving up. You will get the full value of your AVC's back. 

As you are over 50, you have the option of maturing your pension at any time you wish or you can wait until the normal retirement age. 

The key question you need to ask is how much is my fund worth. 


Steven
www.bluewaterfp.ie


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## MrEarl (14 Aug 2017)

SBarrett said:


> ....The problem is how the transfer value is calculated. It uses completely unrealistic assumptions to come up with a figure that is supposed to provide you with the benefit that you are giving up. ....



Hello Steven,

Is there a specific formula for calculating what the transfer value might be, in this type of instance (i.e. when the fund is in "surplus") and if so, what is it please ?

I can fully appreciate that with average life expectancy getting longer, bond yields very low (and annuity rates just as poor as a result), that the transfer value out of a DB scheme might not be what one really needs given current investment conditions.

Thanks.


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## Steven Barrett (15 Aug 2017)

I don't know what it is Mr Earl. Actuaries calculate the transfer values for DB schemes. It's way above my pay station! 

I do know it assumes a net growth rate of 7% and an annuity rate of 4.5%. Both completely unrealistic. 

Steven
www.bluewaterfp.ie


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## spalpeeno (16 Aug 2017)

Hi Steven, thank for the reply. 
Under the rules of the DB scheme the trustees denied my request for leaving on 'early retirement' which I can understand. Now that the fund is winding up can I access my pension whether trustees agree or not? I want the option of accessing 1.5 times of my salary (when I left the firm in 2014) from my AVC element of the pension. I want to explore the option of investing in something which will help generate some passive income now rather than having to wait til I'm 65. Also if a fund is at 125% of the funding standard, does that necessarily mean the fund is healthy or solvent?


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## Steven Barrett (16 Aug 2017)

Yes, when the scheme is wound up, it moves to defined contribution and you can access your fund then. If you go the 150% final salary route, you must purchase an annuity with the remainder, the ARF option is not available to that tax free lump sum choice (you must take 25% tax free lump sum for the ARF). 

If it is 125%, it is good, meaning there is surplus in the fund. But 100% funding level is a long way below actually meeting the actual cost of providing with the benefits the scheme says it will. It's all been a ponzi scheme where the continued addition of younger members paid for the pensions of older members. 


Steven
www.bluewaterfp.ie


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## MrEarl (16 Aug 2017)

SBarrett said:


> ....I do know it assumes a net growth rate of 7% and an annuity rate of 4.5%. Both completely unrealistic.




I agree 100%.

An annual growth rate closer to 4% pa and an annuity rate close to 2% might be more appropriate given what we've seen in the market over the last decade and what is likely for the next 5 years or more.

Then throw the longer life expectancy into the mix and people will need to have their DB payments for longer periods of time.

Are there not influential lobby groups putting pressure on the actuarial society (or whoever may be more appropriate) to wake up and smell the coffee ?


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## Steven Barrett (16 Aug 2017)

MrEarl said:


> Are there not influential lobby groups putting pressure on the actuarial society (or whoever may be more appropriate) to wake up and smell the coffee ?



Who? 

IBEC would be against it as it would result in a massive increase in the cost of DB pensions. The Pensions Authority like having a low minimum funding level as it makes things look as if everything is hunky dorey when it's not. 


Steven
www.bluewaterfp.ie


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## JoeRoberts (16 Aug 2017)

Dept of Social Protection set the rates not society of actuaries. They were reduced recently to 6.75% I think. And as OP is within 10years of retirement the rate used for him is reduced again for each year. But still crazy rates. It's also not clear if the surplus will go to members or back to the company. The trust deed sets out what should happen. I have posted previously about the importance of the Omega Pharama case in this scenario. Deferred members are now also allowed representation as a group in the consultation process .  As a starter I would write to the trustees noting the Omega case  and request that the transfer value be calculated in line with rates that would be used to purchase a deferred annuity. This would be less than 1"% .


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## spalpeeno (17 Aug 2017)

There is to be no refund to the employer. 

With regard to the Omega Pharma case the ruling included the assumption the company had the resources to pay out a better transfer amount. I believe, from previous experiences, the company in my case will insist it is not financially in a position to provide better terms. This may well be true. 

Re the trust deed is this different from the rules of the scheme? 

I also suspect the Rules may have changed as the terms of the DB scheme were significantly reduced/slashed under a Section 50 request a few years ago. This I don't know, nor do I understand the intricacies of these pension schemes. All I know is I had no choice to pay into it all those years ago and knowing it wasn't great I made AVCs.

 I thought this would be ok but over the years the company used the scheme to 'help' early retirees when technology made certain functions redundant. The scheme was closed to new employees a number of years ago and the company had two schemes going: an old DB and a DC.  Mismanagement coupled with the financial crash led to a section 50 change and now the wind up - which I had expected and is no surprise. I am now trying to get a handle on what to do next.


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## spalpeeno (22 Aug 2017)

SBarrett said:


> Yes, when the scheme is wound up, it moves to defined contribution and you can access your fund then. If you go the 150% final salary route, you must purchase an annuity with the remainder, the ARF option is not available to that tax free lump sum choice (you must take 25% tax free lump sum for the ARF).
> 
> If it is 125%, it is good, meaning there is surplus in the fund. But 100% funding level is a long way below actually meeting the actual cost of providing with the benefits the scheme says it will. It's all been a ponzi scheme where the continued addition of younger members paid for the pensions of older members.
> 
> ...



Hi Steven,
Thanks again for the reply. 
So,to be clear, for example if I have a total fund of 300k, I must put 63,500 away until I'm 75 and then can take 25% of the remainder as a tax free sum and invest the rest taking about 4% in income each year?


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## Conan (22 Aug 2017)

If you are going the ARF route you:
- take 25% of the €300,000 as a lump sum
With the remainder you can either:
-invest €63,500 into an AMRF until age 75 or
- use €63,500 to buy an Annuity
And with the balance you invest into an ARF

From the AMRF you can drawdown a maximum of 4% pa 
From the ARF you must draw down a minimum of 4% pa (once you are over age 60).

However do consider whether the option to take up to 150% of Salary as a lump sum (and buy an Annuity with the balance) might be a better option. Depending on the size of the fund and your salary this might give you a much higher tax free lump sum.


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## Steven Barrett (23 Aug 2017)

Conan said:


> However do consider whether the option to take up to 150% of Salary as a lump sum (and buy an Annuity with the balance) might be a better option. Depending on the size of the fund and your salary this might give you a much higher tax free lump sum.



...but with annuity rates as low as they are at present, purchasing an annuity won't represent good value. You should weigh up your financial needs and if you go the ARF route, can you extract the value of it with minimum tax liability. 

I think I have set up 1 annuity in the last 4/5 years. Poor annuity rates and the fact that the policy dies with you are the main factors for people avoiding annuities. 


Steven 
www.bluewaterfp.ie


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## MrEarl (23 Aug 2017)

SBarrett said:


> ...Poor annuity rates and the fact that the policy dies with you are the main factors for people avoiding annuities.
> 
> Steven
> www.bluewaterfp.ie



Either would be reason to avoid going the annuity route, never mind the combination of those two factors !

- long past time the rules were changed, with regards to transfer of an annuity on death.  I know it cannot be let run forever, but the current arrangements are simply wrong.


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## Conan (23 Aug 2017)

My point about the 150 per cent is that it might be possible to get most of the funds tax free, depending on size of funds and salary/service.


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## Steven Barrett (23 Aug 2017)

Conan said:


> My point about the 150 per cent is that it might be possible to get most of the funds tax free, depending on size of funds and salary/service.



I know. I was looking at the same scenario for a client yesterday. 


Steven
www.bluewaterfp.ie


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## Steven Barrett (23 Aug 2017)

MrEarl said:


> - long past time the rules were changed, with regards to transfer of an annuity on death.  I know it cannot be let run forever, but the current arrangements are simply wrong.



The option is always there to purchase a spouse's pension at the point of retirement. 

Remember, that the annuity is guaranteed to be paid out for as long as you live. You don't have that level of security with an ARF. If you live to be 110, the annuity will still be paying out. If you give people money back if they die early, do you stop payments for people who live too long? 

And it is the money of the people who die to young who pay for the cost of those who live too long. 


Steven
www.bluewaterfp.ie


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## Thirsty (23 Aug 2017)

> those who live too long


Good grief....Logan's Run anyone?


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## spalpeeno (23 Aug 2017)

I think I am going to live for ever: after all I've given up smoking; go on red wine 'cos it's good; go off red wine cos it's bad; eat a few eggs a week; stay off eggs 'cos their bad; use olive oil; give up olive oil; - in fact I do all the things the features pages in our newspapers and magazines say I should do. Surely I'll live forever?
Meantime I'll wait and see what the transfer value of my paltry DB pension will be. Thanks guys and as Arnie said, "I'll be back".


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## spalpeeno (17 Nov 2017)

With regard to calculating tax-free lump sum: is it the actual final salary or, in my case, a figure entitled 'pensionable salary' which is quite a bit less than my actual final salary?


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## Conan (17 Nov 2017)

The Scheme rules may calculate the lump sum on “pensionable salary” (depending on the particular rules) but under Revenue rules the max lump sum can be calculated based on gross salary. 
So ideally you need to check whether you are potentially leaving any tax free money on the table when you retire. Even if your scheme rules calculate the lump sum based on a figure lower than you gross salary, you may be able to bridge the gap out of an AVC fund (perhaps a “last minute AVC”).
Worth checking it all out.


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