# Redundancy (shut down) - what can become of the company DB scheme



## Beamie (14 Feb 2007)

The company where I work propose to shut down the site and we are now in the 30-day consultation period before they can give redundancy notice.

My question is what can become of the company defined benefit pension scheme - what options the company have, whether they could wind up the pension scheme and, if so, whether they must make any provision to safeguard the defined benefit.

I would be grateful for any information, guidance, or pointers to further information.

Thanks.


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## Cameo (14 Feb 2007)

*Re: Redundancy (shut down) - pension scheme options*

Hi Beamie 

For what it's worth this is my understanding of the situation.

Legally there may be an obligation for the company to put money in to fund a certain amount of benefit - assuming the pension scheme is not well funded.

However I don't think that this means much if the company does not have money.

Futhermore what the company needs to put into the scheme might not provide benefits which compare favourably to those that would be available if the scheme continued to offer future benefits. 

Current pensioners of the scheme usually get best benefits - but monies paid to members yet to retire is calculated on a basis which is not that generous. The benefit available is usually a cash sum paid to each member. However you would need to get pretty racey future investment returns for this to provide you with the benefit that would be payable if the scheme continued in existence. 

Generally the closer a member is to retirement the worse they do.

Some companies if they have cash available (maybe a rich parent) might 
be willing to put in money to provide better benefits, particularly if they were concerned about reputation (and they can afford to).

Also as above if the company scheme is very well funded (not the norm) the scheme may be able to pay full benefits to members.

Not sure if this helps at all - I would get onto the trustees of the scheme ASAP to see what is happening.


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## ajapale (14 Feb 2007)

*Re: Redundancy (shut down) - pension scheme optionswhat can become of the company DB*

You should contact your trade union representatives as soon as possible and get the negotiation process started.


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## cormacol (15 Feb 2007)

*Re: Redundancy (shut down) - pension scheme optionswhat can become of the company DB sche*

If the Company is shutting down then it is nearly inevitable that the scheme will be wound up. In a wind up situation the distribution of benefitsi s governed by the Pension ACt. The order of priority is something like this

Current Pensioners
Benefits Secured by AVCs and Transfers In
Current Active and Deferred Members

Current pensioners are secured by purchasing annuities with a life insurer - which is an expensive way of providing the benefit (at least relative to the current funding assumptions underlying most pesnion funds)

If the Scheme is fully funded on a solvency basis then active and deferred members receive what is known as a tranfer value - which is a lump sum actuarial equivalent ofyour benefit accrued to date i.e. if you had worked 20 years (and it was 1/60th accrual) your accured benefit is 20/60 * Final Pensionable Salary and this is converted into a present value.

The return assumption underlying the caluclation is not particularly racy but there is an issue curretnly. This issue is in relation to the fact that your transfer vlaue would then be invested on a defined contribution basis and returns are uncertain. Furthermore you are required to purchase an annuity whic hcould lead to a 15% hit relative to what your deferred pension was.

Finally there is no legal obligation for the employer to pay in anymore money even if it is underfunded. If it is a major multinational then there is a moral obligation and i would imagine that they would fund up to the solvency level.


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## Azriel (15 Feb 2007)

*Re: Redundancy (shut down) - pension scheme optionswhat can become of the company DB sche*

I would agree that the news is unlikely to be good.

There are key disclosure requirements (ie there is information that is required to be provided) to members of the pension scheme where it is to be wound up - as is likely to happen. 

The Trustees are key as they are charged with fiduciary responsibilities in respect of the scheme, and where there is no Union you should be contacting the Trustees for information.

The Pensions Board have a regulatory role governing the funding of schemes but the legislation is weak (certainly compared to the UK) and in your circumstances there is less protection than would otherwise be the case. There is no guarantee of any benefit being payable to you in extreme circumstances - which is a key failing of Defined  Benefit schemes. 

I would suggest that you request a copy of the most recent Trustee Annual Report / Actuarial Valuation report - you should be better able to understand the background on reading these. 

DB is great once it all works out - there is an ugly side though. 

In addition little attention is paid to the benefit / scheme financial position / how Trustees are doing their job / how much the Company is contributing until it is all too late. From the Pensions Board report on the Trustee model (released today) I quote the suggestion "Introduce legislation so that employers automatically arrange trustee training for all trustees within six months of their appointment and at least every two years thereafter" - the implication being that your retirement benefits (financial security in retirement) may have been overseen by Trustees who may not have been competent / adequately trained. 

Cold comfort - but a salutary lesson to others.


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## Marathon Man (16 Feb 2007)

*Re: Redundancy (shut down) - pension scheme optionswhat can become of the company DB sche*

Hi Beamie,
I was in a similar situation a few years ago.

My advice is to be proactive about your own affairs, i.e. get yourself sorted in a job or self-employed.  If you don't have a home to put the transfer money into, when the funds become available, you will probably be forced to take a Buy-out Bond.

If you are in a new job, you should be able to transfer your fund in.  If you are self-employed/own your own business, you will have full control over your funds.  I am now a Co Director (contracting) and transferred my funds into an EPP (Executive Pension Plan).  

Unfortunately, when my employer went into liquidation, I waited to see what the options offered by the Trustees were before I set up the EPP - this takes time.  There was a shortfall of 40% in the pension fund and the cash wasn't transferred until some 15 months after liquidation - meantime the market had risen sharply, but my boat was in dry dock!!  

If your circumstances are sorted by the time the funds are being distributed, you should be able to take the funds in without delay.

Also, if you have AVCs, find out where they are!  In my case the Trustees moved the AVC funds back into the main scheme and it took me a long time to find that out (never did find out the dates of transfer - differing stories from Pension & Trustees) - Funds appeared to be held in a non-interest bearing account, but couldn't even find that out.

If you do have any issue with admin of the pension, the Pensions Ombudsman's remit ends on the date of wind-up of the Pension.  As long as you get what you're due at that date, then that's the end of with wrt the Pensions Ombudsman's office.   It would appear to me that any issue after the date of wind-up is in the realm of the Financial Regulator, but I didn't bother with that - fed up and apathetic with the situation.

Your sights will most likely be set on securing your future employment, rather than chasing after these people and the stonewalling is depressing.

Finally, remember that the Trustees are also employees and will not be paid (by the fund) once they are laid off and are, at the same time, probably looking for work too.  Also you and your colleagues will probably be tempted to contact the Pensions Administrators - every time they scratch their ... in response to a query, the fund is being billed for their time - and their time is not cheap - our Trustees had to appeal to us to stop ringing/writing.

Not a great time for you, but best of luck and hope things work out well.


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## Beamie (16 Feb 2007)

First, thanks for all the above replies.  I appreciate your taking the time.  And special thanks to whoever fixed the title of the thread to better reflect the contents.

I was (and am still) very surprised to hear that what is now a DB scheme can be shut down by the company and effectively change overnight into DC instead.  It seems clear from your replies that this is so.

Fortunately, this is a major multi-national, company is cash rich, trustees have done a good job and the scheme appears to be adequately funded.  It appears from previous replies that I should count myself lucky.

One question that seems relevant to this thread (what can become of the db scheme), maybe fodder for negotiation with the company - though there isn't any real leverage for negotiation:

cormacol: "you are required to purchase an annuity which could lead to a 15% hit relative to what your deferred pension was."

Appreciate if someone could explain this to me (or ref. to explanation).

Thanks again.


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## Cameo (16 Feb 2007)

Hi Beamie 
I think point being made is:

when the scheme winds up you get a transfer value - you then invest this (Buy Out Bond) until your normal retirement age - you then purchase an annuity with a portion of this money to provide you regular pension income 

Broadly speaking, the basis used to calculate the transfer value implies that the transfer value you get rolled up at a reaonable investment return will only allow you purchase an annuity which provides an income of about 15% less than the pension which would have been paid by the company pension. 

Not explaining this very well. But I think this is the point. (Cormacol PLease correct me if not )

However important to note that there are many assumptions to get to this estimated drop in income. 

Ultimately you won't know what investment return you will get on tranfer value between now and retirement and you won't know how much it will cost to purchase an annuity at your retirement date. 

So I imagine the 15% drop is probably more a rule of thumb as to how much less you might be expected to get on a wind up basis (assuming company funds transfer values in line with regulation) compared to what you might get if the scheme was on going and paid your benefits on retirement. 

The key point is as you've said is that the nature of your benefits have changed - you were DB and now it's DC - the investment risk (ie that returns are not as expected) is now with you rather than the company. 
Similarly the risk that annuties become more expensive (less competition in the market, different longevity assumptions used by companies selling them) also borne by you rather than company. 

Glad to hear the scheme is in good position with a strong sponsoring company. 

All the best.


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## Guest126 (18 Feb 2007)

The annuity figure used to calculate ther transfer value is based on long-term interet rate of about 4.5% and no profit margin - if you take a transfer to DC and then later try to buy a pension with this fund, the annuity rate used by insurance company is currently based around the 3.5% ECB rate & plenty of profit margin to boot!

Hence the 15% (probably on the low side) discrepancy alluded to.


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## Cameo (19 Feb 2007)

_the annuity rate used by insurance company is currently based around the 3.5% ECB rate & plenty of profit margin to boot!" 
_
CapitalCCC

For info. 

Annuities are normally priced using the yield on assets in which the insurance company plans too invest the lump sum it receives. For annuity sold in the Irish market this usually means government bonds or highly rated (AA or better) corporate bonds with a duration somewhere over 10 years. 

Insurance companies will generally match quite closely the liability they've taken on.


So usually price using a interest rate of about 4.1% (approximate yield on 10 year government bond).


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## Guest126 (19 Feb 2007)

For info - the interest rate being used by the major providers at the moment is about 3.5% (this incorporates their profit margin).


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## 3dolls (22 Feb 2007)

I was recently made redundant by a large multi-national which is now in a 30-day consultation period to wind up the remainder of the site (possibly same multi-national that Beamie refers to). I'm taking some time out and therefore haven't made a decision as yet on what to do with my pension. I heard (informally) that the scheme 'may or may not' be wound up. 
I noted the comments above about being proactive, and wonder what my best course of action is.


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