Uk defined pension fear

S

sunnywalk

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I sought advice on here before about my uk defined pension and received helpful replies.
I am hearing on the news about the recent worrying news around uk defined benefit schemes.
I have a uk defined benefit scheme from my time working in the UK. I am back in ireland a number of years.
I was offered a transfer value a few years ago by the company I had the scheme with, I did not pursue this at the time.

Last month I received another ( requested) transfer value, approx 100k wiped of the value from the value 2 years ago though my benefits of I chose to keep them ( ie monthly annual pension forecasts remained similar)
The news two weeks ago and yesterday regarding dB schemes is very unsettling.
I don't know the ins and outs of economics of what is going on right now, but headlines like DB schemes in the UK might be going bankrupt is scary..
I had been considering taking my monthly benefits from this scheme when I reach 55 ( next year)

I do have a current transfer value of a large sum on the table valid for 3 months ( received in sept) albeit 100k less then 2 years ago.. should I pursue this in light of the recent unsettling news in uk ?
 
Lots of scope to make serious errors here.

I’ve written a guide setting out all the issues for consideration but it is being updated in the light of events in recent weeks.

please feel free to get in touch if you’d like to chat through the issues.


Marc Westlake CFP®, TEP, APFS, EFP, QFA
Chartered Financial Planner, Certified Financial Planner™ Professional
Managing Director
Everlake.ie
 
The headlines are unsettling for sure. A couple of things on this:
1. Most UK DB pension schemes are probably in a better position to meet their expected liabilities now than previously, This is because the present (current) value of their liabilities has gone down by more than the decrease in the value of their assets. Hence the increased returns they can potentially earn over the coming years more than make up for the decrease in the asset value.
2. The problems that they are experiencing are because a lot of schemes have used strategies that involve leverage. Ideally a DB scheme would invest in (relatively) risk free government bonds that would provide the cashflows to meet their expected liabilities. However because the yield on government bonds was so low very few schemes had enough assets to do this. Instead they invested a portion of their assets in bonds and the rest in other riskier assets. As they were concerned about further falls in rates they used derivatives to hedge against this.
3. If you make unrealised losses on derivatives you have to provide collateral (cash or typically high quality bonds) to meet those losses. This is the cause of the problem the DB schemes have been experiencing. Some of the assets they have aren't acceptable as collateral and are too illiquid to sell or to sell in meaningful size without causing further significant price deterioration.
4. I suspect from an asset allocation perspective most funds don't want to sell gilts but are forced to in order to post collateral in cash format or to reduce the probability of further reduction in the collateral value of those gilts. Ironically if the dust settles a lot of schemes will want to buy more bonds (and sell the riskier assets). Sorry getting too technical!
5. Transfer values are typically held for 3 months and have been huge in the UK for the last number of years (they are far less generous in Ireland despite EU rates being lower). If you received your transfer value pre the mini-budget it is likely it is a "good deal" in that it is materially more than it would be today (be aware most schemes have a limit on how often you can request transfer values).
6. Ultimately the schemes are backed by the sponsor (employer) covenant. In considering whether to cash in you should consider how able the sponsor would be to bail out the scheme if there was a real problem, what you would do with the cash if you transferred out in terms of how you would invest and if that was likely to offer a better outcome. The specific scheme you are in may have problems but I suspect that the overall "industry" will be OK and there will be regulatory assistance if further problems manifest.
 
Marc and James

Thank you so much for your response.. I am watching the news closely for sure and will read the above carefully before making any move if I can.

Can I just check is the transfer value I have been currently offered guaranteed for 3 months? Yes I did get the value before the UK mini budget
 
Marc and James BM
thank you both for your replies. Hard for a layman to understand what is going on here.
James your reply is very comprehensive thank you, I did receive my transfer value before the mini budget..does this mean this is guaranteed regardless of what happens Friday when boe withdraw their support?
I know I only have a short time to action that if I choose to do so.
My plan had been to possibly early retire on the actual benefits ie a tax free lump sum and a monthly payment not the transfer value, I only requested the transfer value to have the full picture if where the pension currently stood..( I am limited to.one transfer request a year)

Latest news has spooked me!!
 
The pension valuation will be good for the 3 months. As it is a defined benefit pension, you will have to speak to a UK advisor and they will do up a report as to whether it is a good or bad thing to transfer the benefits out. You will likely also have to speak to a "Money Helper" as transferring out of a defined benefit pension raises red flags in the UK. It is a long process.

But the first thing to do is assess where your defined benefit pension is. A lot of these funds are in trouble as they have used their gilt positions as collateral against derivatives that they bought. Falling value of gilts has created a margin call so the BoE had to step in an buy £65 billion worth of gilts to stabilise the market. This is all as a result of Truss and Kwasi's unfunded and unpriced budget.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
This shows illustrative annuity rates:

Best buy rates

Looking for the best annuity rates? You can find the top rates available from UK annuity providers in our tables, plus receive a quote for yourself in minutes. Find out how much income you could receive from your pension.
www.hl.co.uk

Ignore the details of the assumptions behind numbers for now. If you look at someone aged 60 on the graph for £100k @ year end they could have bought £4,200 of annual income now they can buy £6,400. Alternatively it would have cost them £1m to get an annual income of £42k at the start of the year but now it would cost just £656k. So if you were 60 and your transfer value had fallen by less than 34% you are getting a "better deal". Note that there are a ton of caveats around this analysis, you would need to consider the specifics of your own situation and comparisons can be hard. One other thing to consider is that tax treatment of lump sums from overseas pension schemes in Ireland can be a bit complex also.
To try to allay worries consider how strong is your ex-employer, legally the pension liability is their responsibility. This issue for most funds is a liquidity issue ,although liquidity issues can become solvency issues in fire sales I think that is unlikely in this instance. The systemic consequences of large scheme failing would be severe so I think it likely the BOE would intervene again despite Bailey's assertion.
Note that BOE have bought as of yesterday less than £10bn, the limit they set on buying was £65bn.
If I was asked to construct a scenario for a scheme to fail I would see it as follows:
1. Weak covenant, either from a legal perspective or in that the employer was itself in financial difficulties.
2. Relatively high degree of leverage. For LDI the limit on leverage should be no more than c. twice but given the scale of bond moves that could be problematic. I suspect most funds have much lower levels than that.
3. Big fall in the value of the non-Gilt assets held by the scheme. Falls in listed equities and credit risky bonds get recognised quickly but a lot of the illiquid stuff DB schemes have like PE, infrastructure assets, forestry etc. takes a while longer to be revalued. While risk assets have fallen in value they haven't (yet?!), I believe, gotten to the point where it would be problematic.
4. Small scheme. BT scheme in trouble, Andrew Bailey doesn't sleep! £100m scheme in trouble there will be less concern.

Hope this helps.
 
It's also worth saying that, as you're probably aware , because the value is over £30,000, you need to take advice and find an IFA who will approve the transfer. That will be expensive, even if they rule against the transfer, which they probably will. Then find a scheme that would accept it, even with approval. Unless you've life limiting health issues, I'd say it's very unlikely you'd be able to transfer .
 
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