Give up a Defined Benefit pension scheme?

Hi, my father has a decision to make about a defined benefit pension scheme that he is part of. He has received advice from an independent financial advisor about it but basically the advisor has outlined the advantages and disadvantages of each option to him and now he has to make the decision himself. Just looking for some second opinions here if possible...

Basically, my father was made redundant after 20 years of working for the same company. He has been paying into their defined benefit scheme. The pension fund is currently under-funded and he has been offered a transfer value of only 75% of the value of the pension. His old employer appears to be in a bit of financial trouble so we've been trying to factor that into our thoughts i.e. will the company still be around when my father reaches retirement age in 10 years time.

So it feels like the choice is basically a bit of a gamble. Does he leave the pension as it is and hope the company is still there when he retires and is funded enough to provide him with his pension benefits? Or does he cut his losses, take the 75% transfer value and then at least have the security of knowing that 75% is in a personal pension?

I'd be very grateful if anyone has any recommendations.

It depends how much he needs the money.

Would 75% be enough to keep him ticking over?

No, he can't afford to lose any of it to be honest. But we're worried that if he doesn't move it then he may end up with nothing at all if the company goes bust.

I assume there must be quite a few people in similar situations at the moment. Is there any protection for people if their employer's scheme is badly underfunded and unable to pay out at retirement?

does it matter if the company is still around in 10 years? Isn't the pension fund separate? Is there any possibility that the company could recover its fortunes and
add additional funding over the coming 10 years?

Did he get a figure for his t/f value ? Study the t/v and see what needs to happen for it to buy his expected pension in 10 yrs( even 75% of it) i.e what will it need to earn (on a risk free basis) and what the lump sum would buy in terms of an annuity in 10 yrs. Did he get this outlined from his advisor ?

Note that a transfer value, because of the way it is calculated, does not give him enough money to buy the pension he expected to get (even 75% of it in this case). This is due to the assumptions used in calculating the t/v, i.e. that it will be invested until your normal retirement age and will earn a certain return each year, determined by the Soc of Actuaries. Also a lot of other assumptions that mean it is highly unlikely to be a fair representation of the defined benefit he expected as a % of salary.

In this case there may be an argument for not taking the t/v, as he losses on the double. Has the financial advisor highlighted this ?

As you indicate employer may be going into trouble/liquidation, the fund may come under the new pension protection scheme being proposed by the Govt so may be worth to research this as well.

Also, you say his is offerred his - is it just him and other deferred members or the whole scheme ? it seems a bit strange to offer this to people - the scheme normally saves money if people take a transfer.

I'm not an actuary but maybe some on the board may explain this better if you post details of his t/v and what his expected pension would have been. I just know that t/v calculations as i understand them seem a bit unfair.

What was the outcome from the independent financial advisor?

I would be very reluctant to give up the Defined Benefit scheme if I were you. In the current turmoil in investment markets a 25% underfunding is better than average. This means the funding proposal that the trustees will enter into with the Pensions Board will not be as draconian as many other funds.

I suggest he write to the trustees and ask how they are going to address the current fund deficit. If they have agreed to a funding plan with the Pension Board, as required, then I suggest he stick with the defined benefit scheme.

If the company go out of business the only risk is that they will not be able to maintain the funding proposal. Existing funds will be protected from creditors.

Wondering How/why does this arise? in other words who approached him about it?

Complainer said:

What was the outcome from the independent financial advisor?

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He just said he would probably transfer it into a new pension if it were him. Dad is a bit reluctant as he has been missold things by financial advisors in the past so he doesn't want to jump in on just his opinion.

Friday said:

I would be very reluctant to give up the Defined Benefit scheme if I were you. In the current turmoil in investment markets a 25% underfunding is better than average. This means the funding proposal that the trustees will enter into with the Pensions Board will not be as draconian as many other funds.

I suggest he write to the trustees and ask how they are going to address the current fund deficit. If they have agreed to a funding plan with the Pension Board, as required, then I suggest he stick with the defined benefit scheme.

If the company go out of business the only risk is that they will not be able to maintain the funding proposal. Existing funds will be protected from creditors.

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Thanks, I think I'll get him to write to the trustees about that as suggested. Is it possible to call the Pension Board for any specific information about the pension fund?

mtk said:

Wondering How/why does this arise? in other words who approached him about it?

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He was made redundant and I think the company are obliged to write to him about his company pension at that stage. Not sure if they are or not, but either way he got a letter asking him to select from a couple of options regarding what he wanted to do with his pension, which started the whole ball rolling.

The pension fund is always a seperate credit entity to the employer so even if the employer goes bust, the assets of the fund are protected.

Funding a pension fund is not an exact science and the recent fall in the equity markets has led to a lot of pension funds being underfunded.

I am guessing that the transfer value is only 75% as the fund has been underfunded by the employer to the tune of about 25%. You should get clarification on this. If this is the case then this is what you would get if the empolyer went completely bust tomorrow. As such I think this is a worst case scenario and so would not be worth taking, i.e. worst case is 75% and if the company gets out of trouble you will receive the full 100%.

I suppose, these are all things that your finacial advisor should know about.

Also, I am not sure what JoeRoberts means by suggesting that the transfer value will be an undervaluing of the pension scheme value.
I can't imagine that actuaries would be allowed to make assumptions that would undervalue the pension. Surely, they are a best guess and the pension may end up being worth more or less than the transfer value depending on a number of varying factors (Fund performance, Life expectancy, long term interest rates etc.)

..."Also, I am not sure what JoeRoberts means by suggesting that the transfer value will be an undervaluing of the pension scheme value""

What I mean here is that the lump sum that will be provided as a t/v is very unlikely to provide the expected pension and transfers a lot of risk to the member. The method of calculating the t/v is laid out by the Soc of Actuaries. Put simply, they look at the expected pension at retirement age, then discount back to the sum you would need to get now which if invested at a specified rate will grow to a lump sum to enable you buy the annuity at retirement.
There are a number of risk factors that fall on the scheme member here - the main ones being the expected rate of investment growth and the annuity rate used. If you take a t/v value, you (the member) bear this risk. If you leave the pension as a deferred pension, the scheme bears the risk. The rate that the Soc of Actuaries uses for the assumed investment growth is age dependant but starts out at around 7 or 8 %.

The OP has made it clear now that this is just a regular case where a member has being made redundant and gets a leaving statement with a number of options. In this case the norm is not to take a t/v unless it is going into a new DB scheme. So I would leave it as a deferred pension. Why take the risk that your t/v will make the expected return ? What will annuity rates be in 10 yrs time ? The deferred pension will be revalued each year within the scheme.

This whole area of t/v calculations is in my mind, a major problem in DB schemes. However, the pensions industry will not allow it be changed as pension liabilities would then be higher for all schemes and the current deficits in schemes would be higher. There were attempts to change it in the UK in recent years to make t/v more fair but it got nowhere when the full implications were realised.

Another thought here, who is this financial advisor ? Is he a broker ?

Has he provided a clear financial analysis of the options ?

It would be interesting to post his list of pros and cons on this board.

Had a reply from the pension trustees. Some extracts from their response are as follows:

"The level of guarantee is much the same as any other defined benefot scheme. If the scheme winds up prior to his retirement, there is no guarantee that he will receive all of his entitlements under the scheme. Whilst the company currently has no intention to wind-up the scheme you should note that the scheme is currently underfunded and there is no guarantee that the scheme won't be wound up in the future"

"The scheme does not currently meet the Funding Standard specified under the Pensions Act. This is reflected in the transfer values applicable to all members currently".

We also just heard that the company itself is closing down another area of it's operations. Sounds like things aren't looking too good for the company. Doesn't sound like they are going to be around for long to sort out the underfunding issue within the pension scheme.

The consensus from the responses seemed to be that it's better to leave his pension where it is and not take the transfer value. Would you all still think the same in light of the above?

Thanks again for your responses

As I said before, it seems that even if the company goes bust, your Dad would still probably end up with what he is offered now.

I guess your risk in leaving it in the fund is that the company does not go bust but continues to underfund the scheme which leads to a growth in the deficit.

As Friday suggests, you need to find out what the plans are to reduce the deficit.

Still, on balance it does appear that it is very unlikely that he would be better off leaving the fund.

What advantages did the financial advisor give for leaving the fund?
The only thing I can see is a whole lot more market risk and if the market moves in your favour it might work out.

Well, so much for Defined Benefit pensions being a great thing. The first offer of receiving 75% of the pension as a transfer value expired and after requesting a new one, we have been told that transfer values for the scheme are currently NIL due to the deficit problems. Disaster. Spoke to the Pensions Board who have advised that we get detailed information from the trustees on what has happened to the fund to cause this total drop and to keep up the pressure on them.

So the decision on whether to transfer it or not has been taken out of hands for the time being it seems, seeing as they are saying there is nothing to transfer!

Just thought I'd post this to make people aware that it is going on!