# Should you transfer from a defined benefit pension?



## Marc (29 Dec 2018)

Should you transfer from a defined benefit (also known as final salary) pension?


The UK’s financial regulator has reversed plans to loosen pension transfer rules after finding a “significant proportion” of savers were wrongly advised to give up guaranteed retirement benefits.


The Financial Conduct Authority last year proposed changes that would have made it easier for pensions advisers to advise clients to transfer their defined benefit pensions, which promise an assured retirement income, in return for a cash lump sum.


Currently advisers in the UK must start from the position that the transfers are not appropriate for most clients.


What I find most interesting about this story is that all transfers above a de-minimus amount in the UK must be referred to a pension transfer specialist.


Yet, still there is widespread evidence of mis-selling such as in the recent case of British steel or at least poorly documented advice.


From the FCA paper CP18/7


“In October 2017, we published the findings of our supervisory work on pension transfer advice, looking at transfers from DB to DC schemes. In the files we reviewed, we found that only 47% of advice to transfer from a DB to a DC scheme could be shown to be suitable. In addition, only 35% of the products and funds recommended for the new scheme were deemed suitable. As a result of our work, a number of firms have voluntarily varied their permissions and have stopped advising on pension transfers”

So, the UK applies a rules-based system of regulation and these rules are especially strict in relation to transfers from defined benefit schemes.

In Ireland the regulation is "principles-based" rather than rules-based.

There is no requirement for Irish advisers to take specialist pension transfer qualifications. I have been advising in Ireland for the last 10 years and I have not been required to sit any additional specialist examinations beyond the minimum competency qualification the QFA although I do hold specialist examinations from the chartered insurance institute in the UK.

I haven't conducted a widespread study by any means but the last pension transfer report I reviewed from a well-known Irish employee benefit consultancy fell well short of the UK standard of advice.

I suppose as a consumer I'd prefer to know that advisers were trained specifically to be competent to deal with complex advice with expectations set by the regulator and against which poor advice might be judged rather than a system of "let's hope they do a good job".

With this in mind I will write a more detailed post setting out a triage service for those considering if they should :


Take a transfer from a deferred defined benefit pension;

The issues to consider when leaving/having left Ireland with a retained benefit in an Irish defined benefit scheme;

How to seek advice when a scheme is winding up or if you receive an offer from the trustees of an enhanced transfer value


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## WhiteCoat (30 Dec 2018)

Hi Marc,

I have a deferred pension from the UK. I always understood that unless special circumstances applied (e.g. poor health, etc.) that it was a no-brainer in terms of risk/reward just to leave my pension where it is. At a high level, do you concur?

I must admit finding your post a little confusing. On the one hand, you record the dismal performance of UK advisers and then you say that what you've seen recently from Irish advisers does not match UK standards?


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## Brendan Burgess (30 Dec 2018)

Hi Marc

That is an excellent idea. What happened to British Steel employees appears to be a disgrace although it's not clear to me if their losses are due to the changes in the pension scheme or the vulture advisors who exploited them.

Would the following title to your thread be appropriate...

"You should not transfer from a Defined Benefit Pension Scheme unless..." 

I think that the bar should be fairly high.

Brendan


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## Palerider (30 Dec 2018)

I would not give up my defined benefit scheme no matter what I was presented with, protections are terrific since the Waterford Crystal workers case was successful.

There will be ups and downs in the markets but the defined schemes once funded keep on delivering an income that for many is their only source of fixed income in retirement, not to be messed with except in the most extraordinary of circumstances.


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## Clamball (31 Dec 2018)

Our company proposed earlier this year to close our DB pension scheme and transfer us to a DC pension scheme.  We have a choice of taking an ETV of our pot from the DB scheme and transferring it to the DC scheme or of leaving the DB scheme as it is and starting in the DC scheme with zero.

They got one set of independent consultants to tell us what was proposed and then another set of consultants to give independent financial advice to each member based on their individual financial statement.  It was extremely stressful, I read everything I could and eventually decided that the best for me was to stick with the pot I have in the DB scheme.  Luckily the advisor advised me the same way, said it was a no brained.  Now all I have to worry about is if the DB fund will remain fully funded for the rest of my life.  

My boss however could not wait to get the ETV and get the funds out of the DB scheme and into a DC scheme.


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## jpd (31 Dec 2018)

The DB scheme trustees should keep you up to date on the status of the DB fund annually, at least. Obviously, if the fund is closed, then it's performance will depend on the investments it makes with the fund monies. If you are so minded, you can look at becoming a trustee of the fund - after suitable training and education - and help in ensuring that the fund is been run in a prudent manner for the benefit of its members. The company may also have guaranteed to fund any shortfall or part thereof.


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## Steven Barrett (2 Jan 2019)

With the actuarial methods for calculating a transfer value of a DB scheme out of kilter with reality, staying in the DB scheme should always be the starting point. But the solvency of the DB schemes is always the big issue then and you should always get a copy of the annual and actuarial report to see what the employers intentions are for the scheme.

A lot of people prefer the option of the ARF and with it a potentially higher tax free lump sum. But you are then giving away all guarantees and taking on all the risk and costs yourself. 



Steven
www.bluewaterfp.ie


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## WhiteCoat (2 Jan 2019)

Hi Steven,

Thanks for your post which confirms what I had broadly understood, admittedly, at a high level. In order to understand better the dynamics at play here, I wonder if you could help me with some elements that you addressed in your post.

Firstly, you mention the actuarial methods. What I'd like to know is in what way is the calculation out of kilter with reality and why is in not put back in kilter? In other words, how bad is the methodology, who decides on it and what is the justification?

My second question is about the point you make about the solvency of the plan. I'm taking this to equate to the likelihood of the member actually receiving his pension. What I'd like to know is what safeguards are in place to protect members?

My final question(s) relate(s) to the previous two and I know that this is an Irish site. That said, I think it would be interesting to compare the Irish approach with international best practice. For example, how are transfer values calculated in other countries (i.e. how would the transfer payments compare?) and how are the benefits of members protected, etc? (I'm asking this not just because my own deferred pension is in the UK!).


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## jpd (2 Jan 2019)

I am now receiving a pension from a company pension scheme in the UK where I worked for 10 years up to 1983.

I read the annual reports and actuarial reports every year which was always a great way to understand how the fund was  going. The company agreed to cover the shortfall by making payments over a period of year after the scheme was closed. This was a major factor in deciding to stay with the scheme rather transfer out. I also had worked with some of the pension trustees and had confidence in their ability to manage the scheme in the interests of the members. 

You have to take an interest in the scheme and try to understand the finances - I am sure that most scheme trustees are only too happy to answer your questions and explain what they are trying to achieve


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## Steven Barrett (2 Jan 2019)

WhiteCoat said:


> Firstly, you mention the actuarial methods. What I'd like to know is in what way is the calculation out of kilter with reality and why is in not put back in kilter? In other words, how bad is the methodology, who decides on it and what is the justification?



I've written about this previously . I've copied and pasted the assumptions used: 

There is a discount rate of 7% applied to your benefit. That means that for your transfer value to meet their valuation, your fund has to grow by 7% net EVERY year to retirement. That's pretty difficult to do and would require a lot of risk and a bit of luck.
The post retirement discount rate is 4.5%. With annuities linked to long bonds, this is another tall order.
Inflation is calculated at 2%.
If the scheme is underfunded, your transfer value is reduced accordingly. It would be unfair for members to be able to take 100% of their transfer value, leaving the active members to fund an ever increasing deficit.
The assumptions are agreed with by the Society of Actuaries. Maybe one of the actuaries who posts on here can clarify why such assumptions are used. A guess would be to reduce the cost of transfer values. 



WhiteCoat said:


> My second question is about the point you make about the solvency of the plan. I'm taking this to equate to the likelihood of the member actually receiving his pension. What I'd like to know is what safeguards are in place to protect members?
> 
> My final question(s) relate(s) to the previous two and I know that this is an Irish site. That said, I think it would be interesting to compare the Irish approach with international best practice. For example, how are transfer values calculated in other countries (i.e. how would the transfer payments compare?) and how are the benefits of members protected, etc? (I'm asking this not just because my own deferred pension is in the UK!).



Again, copied and pasted from a previous article

*Both defined benefit scheme and employer is insolvent*

50% of the pension is protected for both pensioners and active and deferred members. Those on pensions of €12,000 or less are guaranteed 100% of their pension (Old Age Pension is additional).
If there is anything left, the pensioners have their annuity topped up to 100%.
Current/ deferred members have their benefits topped up from whatever (if anything) is left.
If there is not enough money to cover the 50% minimum protection level (or 100% of pension is less than €12,000), the government will pay for it from the pension levy.
*Defined Benefit Scheme is insolvent but employer is not*

Pensioners receiving pensions of less than €12,000 are prioritised and get 100% of their pension.
Pensioners who receive between €12,000 and €60,000 receive 90% of benefits.
Pensions who receive over €60,000 receive 80% of benefits.
Once the retirees have been paid, the current/ deferred members receive 50% of benefits.
If there is anything left at this stage, pensioners get their annuities topped up and then current/deferred members
As the company is still trading, there is no government funding in this situation.
The same type of structure applies in the situation where the pension scheme is being restructured.
There are certainly more protections in place for those who have yet to receive their benefits. In the past, there were ranked so far down the list, they got little if anything after everyone else was looked after. 


Can't help you on the international protections. 


Steven
www.bluewaterfp.ie


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## WhiteCoat (2 Jan 2019)

Thank you Steven,

Me again! I'm indulging in a day's goofing & surfing before heading back to work again tomorrow. I really enjoy trying to figure out financial questions so thanks for patiently bearing with me. I'm always amazed how generous subject matter experts are with their time on Askaboutmoney.



SBarrett said:


> The assumptions are agreed with by the Society of Actuaries. Maybe one of the actuaries who posts on here can clarify why such assumptions are used. A guess would be to reduce the cost of transfer values.



I don't really get this bit. What is the purpose of the transfer value calculation? In setting out the methodology, what are the actuaries trying to achieve? Why would they be attempting to keep the transfer values low? Is the transfer value calculation approved by the Regulator?




SBarrett said:


> *Both defined benefit scheme and employer is insolvent*
> 
> If there is not enough money to cover the 50% minimum protection level (or 100% of pension is less than €12,000), the government will pay for it from the pension levy.



I hadn't realised that the levy was still in play for company plans. Is it in a ring-fenced fund?



Finally, are you saying that if the scheme is insolvent but the employer is not then the employer can just walk away from the shortfall in the fund? That seems unfair on members.


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## JoeRoberts (2 Jan 2019)

[QUOTE
The assumptions are agreed with by the Society of Actuaries. Maybe one of the actuaries who posts on here can clarify why such assumptions are used. A guess would be to reduce the cost of transfer values.

[/QUOTE]

I'm not an actuary but my understanding is that the discount rates for calculation of transfer values are set by the Dept. of Social Protection and then incorporated into the actuaries guidelines. There has been some reduction in recent years, I think pre-retirement rate is closer to 6% now. Still way too high of course.

A number of schemes closed in Ireland in the recent past where the rate used was actually _negative_, i.e. it approximated to the cost of buying a deferred annuity. This should be the starting point for Trustees to negotiate pension transfers but few have the guts or knowledge to do so. The Omega Pharma case makes good reading for anyone interested in this area.

https://www.williamfry.com/newsandi...2/lessons-from-the-omega-pharma-appeal-ruling

it's a pity there are not more Trustess out there doing their job properly like these guys. Most Trustees are lame ducks, following the guidance of pension administrators who are paid by the employer.


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## Steven Barrett (3 Jan 2019)

WhiteCoat said:


> Thank you Steven,
> 
> Me again! I'm indulging in a day's goofing & surfing before heading back to work again tomorrow. I really enjoy trying to figure out financial questions so thanks for patiently bearing with me. I'm always amazed how generous subject matter experts are with their time on Askaboutmoney.
> 
> ...



If you leave a DB scheme and take the value of the pension with you, an actuary has to calculate what the real value is. So if I have a guaranteed pension of €30,000, how much will they give me today instead of €30,000 for the rest of my life? They way they calculate it is what do you need today to invest, so that at retirement age, you can fund your own €30,000 a year. It is the figures they use that are unrealistic. As Joe has clarified, they still assume 6% net return. 

It is in the interest of the scheme to keep the transfer figures low so the cost will be less and less people will transfer out. If they used a growth assumption of 4%, the transfer value will be higher. And people would have a more realistic chance of actually getting that return, so more will take money out. Pension schemes will get requests of huge transfers and deplete the fund. 

It is all approved by the Pensions Authority.


The pension levy is not being paid anymore. It was paid for 4 years, increased and given a different name for the 5th year (Noonan then claimed he kept his promise of 4 years. Changing the name doesn't quite cut it!). 

Irish governments don't ring fence anything! They told me that it was also for job creation. I asked them how many jobs they created from it? If you are going to rob billions from people's pensions and use it for job creation, you should be keeping track of the jobs being created. How else would you know it worked? It went into the general exchequer. 

I had just copied and pasted that part of the blog. I've just checked the date of it, December 2013. It was blog #19. We're now at #247!


Steven
www.bluewaterfp.ie


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## WhiteCoat (3 Jan 2019)

SBarrett said:


> An actuary has to calculate what the real value is.





SBarrett said:


> They way they calculate it is what do you need today to invest, so that at retirement age, you can fund your own €30,000 a year. It is the figures they use that are unrealistic.



Hi Steven,

There are a number of points in your post that I just can't grasp.

For example, what you seem to be saying is that the actuary calculates a current value which when invested should replicate the pension that you would otherwise receive within the pension scheme and that in performing this calculation, the actuary uses unrealistic assumptions. What I don't understand is if the actuary is calculating the "real" value why does he use unrealistic assumptions?



SBarrett said:


> It is all approved by the Pensions Authority.



And why would the Pensions Authority approve the use of unrealistic assumptions? Is it not their job to protect members of pension plans?




SBarrett said:


> It is in the interest of the scheme to keep the transfer figures low so the cost will be less and less people will transfer out. If they used a growth assumption of 4%, the transfer value will be higher. And people would have a more realistic chance of actually getting that return, so more will take money out. Pension schemes will get requests of huge transfers and deplete the fund.



If you google pensions transfer values Ireland, there will be a lot of material about pension funds giving incentives for members to transfer out. This seems to be inconsistent with the point that you are making above?


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## Conan (3 Jan 2019)

Transferring from a DB scheme can be very complicated and the numbers can vary from scheme to scheme.
Firstly one needs to determine how well funded the scheme is. In a well funded scheme, it is likely that the transfer value will look better. In an underfunded scheme, it may be that the transfer value will be less.
If one decided not to opt for the transfer, one still needs to consider the security of the scheme going forward and whether or not the promised benefits will actually be paid in the future.
In calculating a transfer value offer, some scheme will reflect any underfunding and thus the figure offered may not be projected to provide equivalent benefits (but possibly in a DC scheme the resulting retirement lump sum might be higher and the option to invest the residual fund into an ARF might be more attractive than a fixed Annuity).
Other schemes may want to “encourage” members to take a transfer value and thus offer an “enhanced transfer value”. This might be because by reducing the funding liability in the DB scheme they are also reducing any unfunded liability which would otherwise have to be taken onto their Company Balance Sheet.
The Actuary to the Scheme, in calculating the transfer value to be offered, will take into account the views of both the Employer and Trustees.

So from the members viewpoint, they need to consider:
- do they want the (relative) security of a Defined Benefit (subject to the likelihood of the scheme remaining solvent into the distant future)
- would they prefer the flexibility of transferring into a DC scheme, which would allow them the option of either buying an Annuity or investing into an ARF on eventual retirement. The individual’s state of health might be a consideration as the DB Annuity might cease on death (unless there is an attaching Spouse’s Pension), whereas an ARF might allow for any remaining ARF fund to transfer to a spouse or children.

So this is a complicated decision and I would suggest that good professional advice is essential.


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## Steven Barrett (3 Jan 2019)

WhiteCoat said:


> For example, what you seem to be saying is that the actuary calculates a current value which when invested should replicate the pension that you would otherwise receive within the pension scheme and that in performing this calculation, the actuary uses unrealistic assumptions. What I don't understand is if the actuary is calculating the "real" value why does he use unrealistic assumptions?



I am waiting for an actuary who posts here to explain it. I don't work in defined benefits, so maybe someone with more experience in the area can explain. 



WhiteCoat said:


> And why would the Pensions Authority approve the use of unrealistic assumptions? Is it not their job to protect members of pension plans?



They have very little power. And what they do do, is ensure that schemes are run properly and are solvent. The minimum funding levels set the bar so low that a "fully funded" defined benefit pension scheme couldn't possibly meet its liabilities. 



WhiteCoat said:


> If you google pensions transfer values Ireland, there will be a lot of material about pension funds giving incentives for members to transfer out. This seems to be inconsistent with the point that you are making above?



If the transfer value was higher, everyone would transfer out. It would cost the employer even more money and there would be a rush. The incentives offered are selective and for a limited period. 


Steven
www.bluewaterfp.ie


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## WhiteCoat (3 Jan 2019)

Thanks Conan and Steven,

I agree that it makes sense for an actuary to comment on my various questions.


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## elacsaplau (3 Jan 2019)

Hi WhiteCoat,

I'm afraid I don't really have time to answer all your questions right now. Maybe in a few days time when things settle down a bit. In the meantime, I'm posting the link to the current TV basis, as mentioned by JoeRoberts. At a high level, it's a very weak basis (not aware of any country with a weaker one). In an earlier post, Steven set out the headline assumptions of the previous TV basis, as follows:



SBarrett said:


> There is a discount rate of 7% applied to your benefit. That means that for your transfer value to meet their valuation, your fund has to grow by 7% net EVERY year to retirement. That's pretty difficult to do and would require a lot of risk and a bit of luck.
> The post retirement discount rate is 4.5%. With annuities linked to long bonds, this is another tall order.
> Inflation is calculated at 2%.
> If the scheme is underfunded, your transfer value is reduced accordingly. It would be unfair for members to be able to take 100% of their transfer value, leaving the active members to fund an ever increasing deficit.


The bit that I'd be most concerned about in Steven's description is that he seems to be unaware of the "market value adjustments" that apply to 1 and 2 above - see the guidance notes per link below. Not sure how mathematical you are but sure @dub_nerd will put a tutorial together in jig time for all users!

https://www.pensionsauthority.ie/en...tion_34_of_the_Pensions_Act_1990_Oct_2016.pdf


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## Steven Barrett (4 Jan 2019)

elacsaplau said:


> Hi WhiteCoat,
> 
> I'm afraid I don't really have time to answer all your questions right now. Maybe in a few days time when things settle down a bit. In the meantime, I'm posting the link to the current TV basis, as mentioned by JoeRoberts. At a high level, it's a very weak basis (not aware of any country with a weaker one). In an earlier post, Steven set out the headline assumptions of the previous TV basis, as follows:
> 
> ...



Elacsaplau
When I blog about a topic, I keep it general. 


Steven
www.bluewaterfp.ie


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## Bronte (4 Jan 2019)

As far as I'm concerned a defined benefit is the gold standard. My husband's company moved all new staff to defined contribution and sent in top notch heavy hitting suits to 'sell' it to the existing staff. Much like this thread and others they tried to bamboozle them with reams of documentation, slides and presentation.  You'd literally be brainwashed into believing black was white.  This is not meant as an insult to the very knowledable posters on here. But this area is very complex to ordinary people. So my post is only to say 'watch out'.


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## Marc (4 Jan 2019)

I am going to set out the key considerations as I work through this post (so please resist the temptation to have a pop as this is work in progress).

The default position should always be this

*It is generally a bad idea to take a transfer value from a defined benefit pension scheme for an average person.*

So, the first question you should ask yourself is this; "why am I different?"


Above average wealth - you might not need the guarantees that the scheme offers
Linked to this, tax planning
Desire to access pension before normal retirement date, again this may be linked to wealth and creates a more tricky situation when linked to debt.
You may be living in a different country or plan to retire to a different country and need to consider these additional complexities.

Then ask yourself; "why am i considering taking the transfer now?"

a) Your employer's scheme is being wound up


You have to take a transfer and you should seek *Independent advice* on what to do
b) You have been sent a statement by the trustees and the transfer value seems like a lot of money


Most people have an unconscious bias toward a tendency to increasingly choose a smaller reward now, over a larger-later reward. The notion of discounting future rewards relative to immediate pleasure has a long history.
Its hard to "see" what we are really giving up in return for what looks like a substantial sum now.
You should take *Independent Advice* from a competent adviser who specializes in this area.
c) If I die the pension is lost

Here is a real case study to illustrate this point

John is 50 and has a deferred pension of €20,622pa payable from age 65. This is revalued each year up to a maximum of 4%pa. So he can assume the pension at age 65 is going to be more than €27,000 but that’s just €20,622 in today’s terms.

If he dies as a deferred member, there is a lump sum payment to his spouse which is currently €267,000
However, his spouse's pension payable in retirement is just €10,311

The transfer value today is €267,000

John reasons that if he dies in retirement, his spouse and family will be much worse off than if he took the transfer value.


On the face of it, this seems like a reasonable course of action.
However, taking a transfer isn't the only way to resolve this risk.
Assuming John is in reasonable health he could arrange a life assurance contract to provide a tax free payment to his spouse or civil partner in the event of his death and continue to receive the benefits of the pension if he and his spouse live long and healthy lives.
If he is in poor health and/or uninsurable, well that points towards evidence that taking the transfer value might be the best course of action
Put another way if John lives to be age 100, then remaining in the scheme will probably turn out to be the best course of action. Whereas if he dies tomorrow, a life assurance policy would protect his spouse and family against the loss.
So you should be wary about taking the transfer value to protect against something that can be insured through life assurance
The problem is that there is no “best before date” on your birth certificate

d) it’s my money, give me the cheque please

Today it costs you around €725,000 to obtain a comparable level of income from an insurer today assuming current annuity rates for a 65-year-old with 50% spouses pension and escalation of 1.5%pa. (i.e to exactly match the benefits provided by the DB scheme)

(Note to simplify the explanation I’m using current annuity rates available now rather than the more complex formula required by say the UK regulator.)

So, if John takes the transfer value of €267,000 it needs to grow to €725,000 in today’s money by age 65 in order to guarantee (via an annuity) he can match the benefits given up.

It doesn’t matter if John doesn’t want to buy an annuity, hates annuities or any other preference he might hold. The ONLY way he can guarantee the benefits given up for the whole of the rest of his life and that of his spouse, is by buying an annuity with the same spouses benefit and indexation.

We call this the “critical yield” and it gives John an idea of what he needs to do if he takes the transfer value now and wants to avoid being worse off in retirement.

By making some simplifying assumptions I’ve made the calculation easier:

Fund now €267,000
Fund required at age 65 €725,00
Term to age 65 15 years
Solve for real interest rate =inflation +6.89%pa on average.

So if John takes the money now, he has to achieve an average annual real return of CPI+6.89%pa every year for 15 years AFTER costs and charges (all else being equal) to be able to go to an insurance company and buy an annuity to match the benefits he gave up by taking the transfer value.

John is going to need to take a high investment risk to get anywhere near enough in the fund to match the benefits given up.

e) maybe don’t take the transfer now but take it later?

By staying in the scheme you allow the trustees and the employer to take all the risk and cost.

Using my earlier calculation as a guide what do you think the transfer value is going to be the day before John’s 65th birthday.

It’s going to be pretty close to the €725,000 in today’s money necessary to purchase an annuity to provide the promised benefits.

The difference is that John doesn’t have to do anything for this to happen. His transfer value is going to increase by a real inflation adjusted 6%pa so why not wait it out and take the transfer nearer retirement?






Some potentially good reasons for taking a transfer

Require access to funds (early retirement)
No requirement for pension in retirement
Inheritance Tax Planning
Ill health
Weak Employer covenant and Trust Deeds & Rule
Material one-off uplift provided
Ability to negotiate uplift


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## WhiteCoat (4 Jan 2019)

Thanks Elacsaplau,

That makes much more sense to me. I look forward to your further explanations.

Marc,

I don't understand this. Can you elaborate please?



Marc said:


> Here is a real case study to illustrate this point
> 
> John is 50 and has a deferred pension of €20,622pa from age 65
> If he dies as a deferred member, the payment to his spouse is €267,00
> ...


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## elacsaplau (5 Jan 2019)

Bronte said:


> As far as I'm concerned a defined benefit is the gold standard. My husband's company moved all new staff to defined contribution and sent in top notch heavy hitting suits to 'sell' it to the existing staff. Much like this thread and others they tried to bamboozle them with reams of documentation, slides and presentation.  You'd literally be brainwashed into believing black was white.....



Jeepers Bronte - tell us what you really think! Happy new year to you! As it happens, I agree with very much of this.

The document from the link below is interesting. In response to just one of WhiteCoat's excellent questions, it explains why companies might be very interested in making transfer value (TV) or enhanced transfer value (ETV) payments. In reading it, please bear in mind that the standard transfer value is based on the Minimum Funding Standard (MFS) and the clue is in the M here. Quite simply, it is a very weak basis of valuing the liability (i.e. the future pension benefit promise). In other words, the same actuary who values the liability at X for MFS purposes will value this same liability as X+ in the triennial/funding valuation, X++ to satisfy the accountants that the liability is being prudently valued and X+++ as the buy-out cost.

And don't think X+++ is completely off the scale...….when a DB plan winds up in the UK, it's the X+++ cost that the employer is facing and it automatically becomes a debt on the employer. (In the UK, other member protections kick in where the employer is insolvent.)

https://www.mercer.ie/content/dam/m.../Ireland/ie-2017-enhanced-transfer-values.pdf

In all of this, you can see how the interests of the member could get hurt by the _top notch heavy hitting suits.

- _The employee benefit (EB) consultancy wants to demonstrate a successful liability reduction campaign in order to justify its fees (i.e. it needs a number of members to transfers out);
- The sponsoring employer also wants reduced liabilities and the funding and accounting gains demonstrated in the flyer (i.e. it needs a number of members to transfer out) and
- The independent financial adviser to whom the member seeks advice may be conflicted. If, for example, the member does transfer out, and invests the TV with his agency, there is the prospect of the financial adviser receiving greater remuneration in the long-term than had the member simply left his entitlement in the DB scheme. (As Marc correctly pointed out there is also the possibility that the financial adviser does not really understand this complex area sufficiently.)

I am certain that some members have got mushed in the past because of the combined efforts of the three parties above in addition to poor regulatory protection for members. I don't envisage any meaningful changes anytime soon.


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## Clamball (5 Jan 2019)

Our company did a hard sell on us to agree to close the DB scheme, fancy brouchers, PowerPoint presentations, short time frame, individual meetings with senior managers.  The main driver for the company was accountancy certainties on the annual results as they will not have to make large allowances for future liabilities in the DB pension scheme.  The calculations used to calculate the ETV were not disclosed so there was a perceived lack of transparency.

I think one important factor is that people like myself employed and paying into a DB scheme are in the main financially risk averse and want the security of employment with low risk DB pension.  If I felt I was more of a risk taker financially maybe I would not be in this type of employment in the first place.  My level of risk and my personal circumstances played a big part in my decision to stick with the DB scheme and not take the ETV.  What I would be poor at assessing is will the company continue to fund the DB scheme until I die, my insight and skills are insufficient and so this is the risk I have taken.  I can dig out and give my figures if anyone is interested.


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## elacsaplau (5 Jan 2019)

Hi Clamball,

I think that the idea of sharing the details is very interesting. In this way, the debate can become much more real. If this works for you, it would be really important to anonymise all personal details (for your own security, etc.)


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## Gordon Gekko (5 Jan 2019)

WhiteCoat said:


> Thanks Elacsaplau,
> 
> That makes much more sense to me. I look forward to your further explanations.
> 
> ...



I would take the €465,000 in a heartbeat.


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## RETIRED2017 (5 Jan 2019)

Gordon Gekko said:


> I would take the €465,000 in a heartbeat.


One thing people need to take into account if there is a shortfall in the defined benefit fund  will the company be in a position to make up the differance long term , Is there a chance the company will be gone out of business,


 I know already in Ireland the tax payers and people in defined contribution schemes bailed out defined benefit schemes it went under the radar at the time ,with people better informed now I see a time when it will cause problems  ,I think EU forced the Government to bail out defined schemes  ,I can see a time when people well start kicking back against unfair EU rules and questioning the unfairness on others not in defined pension schemes,


 Just for the record I retired from a private Company Defined Benefit Scheme on retirement my entitlements to my retired benefit pension no longer are tied to the existing company fund,

People need to look and take into account the company under pinning there Defined Benefit and how/can it will be funded into the future when making up there minds ,

The above may not be very well explained but no poster covered the above points some are in a very good position to do so ,I am not sure Marc covered the above are all Defined Benefit Schemes safe if you decide to leave your funds in them having being offered to transfer funds out of  defined benefit scheme and decided not to do so

You often find the rules of the scheme will work in favour of high earners who can leave and drain the fund on lower grades if problems start to show up in funding,


It is quite possible people who finish up on high final salary will drain the funds on people who work in the company who spent all of there working life in lower grade positions,


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## JoeRoberts (5 Jan 2019)

Marc said:


> John is 50 and has a deferred pension of €20,622pa from age 65
> If he dies as a deferred member, the payment to his spouse is €267,00
> His spouse's pension payable in retirement is just €10,311
> 
> The transfer value today is €465,000



I'm a long time away from this but the TV in this scenario would be well less than 200k based on the set parameters the actuary has to work with.
This is the nub of the problem. I presume by 465k you mean this to be the properly calculated TV if the actuary was free to use his own parameters reflecting market conditions ?

The gap between the standard TV and the actual fund required to buy the benefit is huge but gets smaller as people approach retirement age


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## elacsaplau (5 Jan 2019)

JoeRoberts said:


> I'm a long time away from this but the TV in this scenario would be well less than 200k based on the set parameters the actuary has to work with.
> This is the nub of the problem. I presume by 465k you mean this to be the properly calculated TV if the actuary was free to use his own parameters reflecting market conditions ?
> 
> The gap between the standard TV and the actual fund required to buy the benefit is huge but gets smaller as people approach retirement age



I agree with all of this based on the bare details supplied. WhiteCoat has already asked Marc to clarify the figures.


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## Bronte (6 Jan 2019)

Elacsaplau I would put it more plainly than you did. The suits were there as slick oil salesmen. They would make money on you. The company would no longer have the cost of DB and my husband would be the loser. The only person there to counteract the experts was me. And wives/spouses weren’t invited to any of the hard sell.

As ordinary people, it’s mentally difficult to know it’s a hard sell when it’s done so expertly suited. And that’s the point entirely of it. 

Sure I get for someone like Geko, or others, managing your own money might be a better way to go.


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## Bronte (6 Jan 2019)

Clamball said:


> Our company did a hard sell on us to agree to close the DB scheme, fancy brouchers, PowerPoint presentations, short time frame, individual meetings with senior managers.  The main driver for the company was accountancy certainties on the annual results as they will not have to make large allowances for future liabilities in the DB pension scheme.  The calculations used to calculate the ETV were not disclosed so there was a perceived lack of transparency.
> 
> I think one important factor is that people like myself employed and paying into a DB scheme are in the main financially risk averse and want the security of employment with low risk DB pension.  If I felt I was more of a risk taker financially maybe I would not be in this type of employment in the first place.  My level of risk and my personal circumstances played a big part in my decision to stick with the DB scheme and not take the ETV.  What I would be poor at assessing is will the company continue to fund the DB scheme until I die, my insight and skills are insufficient and so this is the risk I have taken.  I can dig out and give my figures if anyone is interested.


Would love if you did this.  The figures.  And then have Marc tell us if you made the right decision. The documentation my husband received ran to several pages. And I don’t mean 20.


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## Bronte (6 Jan 2019)

SBarrett said:


> With the actuarial methods for calculating a transfer value of a DB scheme out of kilter with reality, staying in the DB scheme should always be the starting point. But the solvency of the DB schemes is always the big issue then and you should always get a copy of the annual and actuarial report to see what the employers intentions are for the scheme.
> 
> A lot of people prefer the option of the ARF and with it a potentially higher tax free lump sum. But you are then giving away all guarantees and taking on all the risk and costs yourself.
> 
> ...


Why is the actuarial method for calculating the transfer value out of kilter with reality?

My husbands company is a solid billion dollar company. So I never thought there was any danger in the fund. As regards solvency.


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## Bronte (6 Jan 2019)

Marc said:


> The UK’s financial regulator has reversed plans to loosen pension transfer rules after finding a “significant proportion” of savers were wrongly advised to give up guaranteed retirement benefits.
> 
> Yet, still there is widespread evidence of mis-selling such as in the recent case of British steel or at least poorly documented advice.
> 
> the last pension transfer report I reviewed from a well-known Irish employee benefit consultancy fell well short of the UK standard of advice.



Translation: don’t trust the so called experts.

- widespread mis-selling
- wrongly advised by so called experts
- regulated experts means nothing
- ETV is fake (what Steven said)
- Regulator locking the door when the horse has bolted
- Vulture advisors according to BB

Basically a load of ordinary people were conned out of their money. By experts. This is retirement money. Money you can never hope to get back.  It’s absolutely disgraceful.


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## Bronte (6 Jan 2019)

Brendan Burgess said:


> Hi Marc
> 
> That is an excellent idea. What happened to British Steel employees appears to be a disgrace although it's not clear to me if their losses are due to the changes in the pension scheme or the vulture advisors who exploited them.
> 
> ...


What is a vulture advisor?


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## RedOnion (6 Jan 2019)

Bronte said:


> What is a vulture advisor?


They're clearly the ones that can't spell...



Bronte said:


> - widespread misspelling



....sorry, I couldn't resist.


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## Gordon Gekko (6 Jan 2019)

Bronte said:


> Elacsaplau I would put it more plainly than you did. The suits were there as slick oil salesmen. They would make money on you. The company would no longer have the cost of DB and my husband would be the loser. The only person there to counteract the experts was me. And wives/spouses weren’t invited to any of the hard sell.
> 
> As ordinary people, it’s mentally difficult to know it’s a hard sell when it’s done so expertly suited. And that’s the point entirely of it.
> 
> Sure I get for someone like Geko, or others, managing your own money might be a better way to go.



Take two scenarios:

- You can have an ARF of €1m

- You can have a non-State-funded defined benefit pension of €30k a year for life (or whatever the exact number is that €1m would buy you were it an annuity)

I would always choose the first option, because:

- The second one is not “defined”; it’s merely a promise from a fallable entity

- On death, the €30k typically halves, so the surviving husband/wife then gets €15k a year. With the ARF, the drawdown stays the same

- On the second death, the pension disappears, whereas with the ARF, kids get 70% of its value into their hands

- Yes, the ARF is subject to market risk, but that’s manageable, despite what doomsday merchants would have us believe


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## WhiteCoat (6 Jan 2019)

Gordon Gekko said:


> I would take the €465,000 in a heartbeat.



Gordon,

It looks like you were right to act as swiftly as you did as the offer is no longer on the table! I still don't understand this example and await an explanation. In your example above, I would also go with the €1m option but I'd suspect that in real life the pension foregone would be more than €30k each year.


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## Monbretia (6 Jan 2019)

As it happens I have a pension quote or whatever you'd call it at the moment, now it doesn't have a transfer value as I didn't ask for that option, it's a DB and this is for an early payment before normal pension date.  The annual pension offered is 19k and the amount they value it at for that Standard Fund Threshold is 380k.


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## elacsaplau (7 Jan 2019)

Marc,

There are two errors in your updated analysis, as follows:



Marc said:


> Here is a real case study to illustrate this point
> 
> John is 50 and has a deferred pension of €20,622pa payable from age 65. This is revalued each year up to a maximum of 4%pa. So he can assume the pension at age 65 is going to be more than €27,000 but that’s just €20,622 in today’s terms.
> 
> ...



According to Irish Life, the relevant annuity rate is about 3% - making the target fund for €27k p.a. pension equal to €900k




Marc said:


> His transfer value is going to increase by around 6%pa so why not wait it out and take the transfer nearer retirement?



This is not correct. Please refer to the guidance notes previously provided.


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## elacsaplau (7 Jan 2019)

Gordon Gekko said:


> Take two scenarios:
> 
> - You can have an ARF of €1m
> 
> ...



Hi Gordon,

Your choice may not change and may very well be the right one (certainly for someone with your investment liathróidí!), but I think the relevant comparative figures will be closer to the following than those used in your example.

Say you were in a DB plan with a level (non-escalating) pension of €43,000 with an attaching spouse's pension of 50%, the TV on offer would be approximately €1m.

The annuity rate for such a pension is c. 3.8%, meaning that if you used the €1m to purchase an annuity, you'd end up with an annuity of €38,000 p.a.

The original question is whether to elect to transfer out of a DB plan. So for someone electing to transfer out, the question is whether one would prefer €1m in an ARF or c. €43k p.a. in a DB plan. (I suspect that you would still go for the €1m but it's less of a clear cut than the figures used in your post).

One point to remember is that the standard TV is at its best value just before retirement - the further out from retirement one goes, the weaker the basis becomes. In addition to the bare numbers, obviously there are a pile of other factors in play at a personal level.


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