AVC Risk?

D

Dazed&Confused

Registered User
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Hi folks,

I am eager to get your perspective on risk... currently I have a DB pension with a large MNC with the pension managed via Mercer. I have started to contribute to AVCs last year - this is also done via Mercer.

my question: Is it a risk to have both my company DB pension & AVCs together? Or should I do the AVCs with a different provider? I hope / assume the risk is very low. But if I can avoid such a risk with a small change now, I would prefer to take action... or am I over analysing this?

C&D
 
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How old are you And when will you retire?
When you refer to a Mercer, they are mostly a pensions advisory firm, so no risk with them.
The ”risk” you refer to is presumably investment risk?
Assuming your DB scheme is well funded and likely to deliver the expected benefits, then the “risk” element is purely associated with the investment risk inherent in your AVC fund choice and the investment manager Involved.
so:
- what type of fund(s) is your AVC invested in ?
- who is the fund manager?
- what is your timeframe to retirement?
- what’s your objective in contributing AVC?
 
Thanks Conan. Your questions help me clarify my thinking / question...

I am not asking about investment risk. The risk I am thinking of is if my employer was to go under or DB was under-funded in the future, is it a "risk" to have my AVC linked to the same scheme? Or should I go with a separate PRSA? (Is that possible?)

What prompted my question was reading the following statement in my DB booklet:
  • "However, there is no guarantee that the scheme will have sufficient funds to pay the benefits promised. It is therefore possible that the benefits payable under the scheme may have to be reduced. If the scheme is wound up and there is a deficit, the employer may not be under an obligation to fund the deficit or even if the employer is under such an obligation, they may not be in a position to fund the deficit."
 
To answer your questions...
Conan said:
How old are you And when will you retire?
Click to expand...
  • I am 40... & the DB pension pays out @ 65...
  • In saying that, I would live to retire early - say 55 sounds like a nice age (who wouldn't like to retire younger!). That gives me 15 years to pay off 2 mortgages, fund 3 girls through college (assuming that is the right thing to do for them) & build a financial bridge of 10 years... I am highly driven & ambitious!
Conan said:
so:
- what type of fund(s) is your AVC invested in ?
- who is the fund manager?
- what is your timeframe to retirement?
- what’s your objective in contributing AVC?
Click to expand...

- what type of fund(s) is your AVC invested in ?
- who is the fund manager?
  • ZURICH - ASPIRE MODERATE GROWTH PORTFOLIO - 8% growth so far...
- what is your timeframe to retirement?
  • 25 years

- what’s your objective in contributing AVC?
  • My objective for an AVC is to help top up my DB pension (assuming I retire @ 55 vs 65 ) to my current standard of living.
 
If you contribute to an AVC fund along side a DB scheme, the two are separate. The AVC scheme is effectively a series of individual DC funds . So if the DB scheme became underfunded it has no affect on the attaching AVC. You could establish a separate PRSA AVC , but is possible (probable?) that the attached AVC is more competitively priced.

its worth pointing out that under Revenue rules you cannot contribute to an AVC with the specific intention of retiring early. Under Revenue rules there are maximum benefits which can be provided under Pension Schemes , eg
- pension of 2/3rds Final Salary (before communing any for a lump sum)
- spouses pension on your death in retirement
- indexation in payment

In calculating how much AVC you can invest you have to assume that you are retiring at nor retirement age. So to what extent will the normal retirement benefits fall short of the Revenue maximum? That’s your scope for AVCs. If you do actually retire early, your main scheme benefits will be reduced (significantly if you retire at age 55) but the Revenue maximum is also reduced reduced.
So in determining how much AVCs you can contribute you need professional advice. I assume Mercer have checked the numbers?
 
Thanks for the reply Conan - for some reason I missed it, so am only replying now.
Conan said:
If you contribute to an AVC fund along side a DB scheme, the two are separate. The AVC scheme is effectively a series of individual DC funds . So if the DB scheme became underfunded it has no affect on the attaching AVC. You could establish a separate PRSA AVC , but is possible (probable?) that the attached AVC is more competitively priced.
Click to expand...
Great - you have addressed my motivation for asking the question. Thank you Conan.

Conan said:
its worth pointing out that under Revenue rules you cannot contribute to an AVC with the specific intention of retiring early. Under Revenue rules there are maximum benefits which can be provided under Pension Schemes , eg
- pension of 2/3rds Final Salary (before communing any for a lump sum)
- spouses pension on your death in retirement
- indexation in payment
Click to expand...
Just so I clear - do you mean I can't access the AVC until I access my DB scheme at 65?

Conan said:
In calculating how much AVC you can invest you have to assume that you are retiring at nor retirement age. So to what extent will the normal retirement benefits fall short of the Revenue maximum? That’s your scope for AVCs. If you do actually retire early, your main scheme benefits will be reduced (significantly if you retire at age 55) but the Revenue maximum is also reduced reduced.
So in determining how much AVCs you can contribute you need professional advice. I assume Mercer have checked the numbers?
Click to expand...
By "Revenue maximum", is that the €2M (Standard Fund Threshold)?
If so - I have done analysis on the value of my DB but I have yet to validate it with Mercer or get a professional finance review yet. Based on my current salary (assume no increase over next 15 years) & time served (to get to 55), I have some wiggle room for AVCs (~ €150k) by the time I hit 55. That is based on my DB pension being valued at x26 - the multiplier came from Mercer.
 
You can only encash the AVC fund when you draw down the main scheme benefits. The two are linked.

in terms of Revenue max, there is a €2.16m fund max, but the more common limit is:
- a Pension of 2/3rds salary (inclusive of any lump sum)
- indexation of the Pension in payment
- a spouses pension (on the death in retirement of the scheme member) of 100% of the member pension.
so if your expected benefits at age 65 are less than the Revenue maximum, then you can fund AVCs to ostensibly fill the shortfall, even if you subsequently use the AVC fund to fill a similar shortfall on early retirement. What you cannot do is fund AVCs where your main scheme benefits at at the max (based on retirement at age 65) purely in anticipation of retiring early.
hope this helps.
 
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