Opting out of DB pension scheme

Plu2370 · 15 June 2017 at 3:21PM

I'm currently a member of the LGPS but work in the private sector after being TUPE'd a few years ago. I'm 29 and have been in the scheme for just over 10 years with 6 years final salary at 1/60th and the rest CARE. If I left today it would give an annual pension of about £10k.

I can continue to be a member of the scheme whilst I work for my current department but if I were to get a job in the wider company I would not be able to continue. I am unlikely to remain in my current department beyond the next 18-24 months but would look to stay with the wider company.

I am exploring whether to ask my employer about voluntarily giving up my LGPS membership in exchange for a pay rise equivalent to their current contribution. I've no doubt the automatic reaction many would have would be don't be silly! It would however mean with the combined equivalent of current employer and employee contributions I could contribute £20k a year to a DC pension. This would start building me a pot to give me the option of retiring early with the security of some DB in the future. It would also give me a 20% pay rise now which will help with salary negotiations with any future internal jobs.

Worth looking at or should I cling on to the LGPS as long as I can whilst pushing my salary as much as I can?

dunstonh · 15 June 2017 at 3:54PM

I am exploring whether to ask my employer about voluntarily giving up my LGPS membership in exchange for a pay rise equivalent to their current contribution.

Technically, they are not allowed to do that. There should be no incentive given to opt out. It could also open up a can of worms.

I've no doubt the automatic reaction many would have would be don't be silly!

And for good reason.

It would also give me a 20% pay rise now which will help with salary negotiations with any future internal jobs.

Where do you get this 20% extra from?

Silvertabby · 15 June 2017 at 4:21PM

“ I am exploring whether to ask my employer about voluntarily giving up my LGPS membership in exchange for a pay rise equivalent to their current contribution.
”

Technically, they are not allowed to do that. There should be no incentive given to opt out. It could also open up a can of worms.

Never known that to happen in my 20 years as a LGPS administrator

“ It would also give me a 20% pay rise now which will help with salary negotiations with any future internal jobs.
”

Where do you get this 20% extra from?

Probably his employer's contribution to the LGPS - varies by employer, but 18% is common, and I've seen 24%

Malthusian · 15 June 2017 at 5:05PM

The employer doesn't pay national insurance on pension contributions so if they were willing to pay you a higher salary in exchange for dropping the 20% pension contribution (if that is what it is), they would only offer you a 17% pay rise. After higher rate tax that means you get a 10% pay rise in exchange for losing 20% of your pay in pension contributions with hugely valuable guarantees attached. Yes, it would be immensely silly.

It should make no difference to salary negotiations at all. You should be taking the pension contribution into account in any negotiations already.

hyubh · 15 June 2017 at 6:10PM

Malthusian wrote: »

The employer doesn't pay national insurance on pension contributions so if they were willing to pay you a higher salary in exchange for dropping the 20% pension contribution (if that is what it is), they would only offer you a 17% pay rise.

Why? It's not a matter of one cash cost being exchanged for another - continuing LGPS membership intrinsically carries risk from the employer's POV that a higher salary does not.

dunstonh · 15 June 2017 at 6:38PM

hyubh wrote: »

Why? It's not a matter of one cash cost being exchanged for another - continuing LGPS membership intrinsically carries risk from the employer's POV that a higher salary does not.

And what happens about the next auto-enrolment point where they have to opt the person back in again. That person will have a contract with a higher salary.

There was an amendment to the Pensions Bill that prohibited employers from offering incentives, such as higher salaries, or one-off bonuses, to encourage staff to opt out.

And. as the pension regulator says:
It is worth noting that, in the event that the worker is put back
in to pension saving following an inducement breach, the
employer has no legal right to recover any financial or other
benefit from a jobholder/entitled worker that the employer
may have given to them, in exchange for their agreement to
opt out. For example, they have no legal right to recover any
of the higher salary level they gave them to opt out.

hyubh · 15 June 2017 at 7:01PM

dunstonh wrote: »

And what happens about the next auto-enrolment point where they have to opt the person back in again.

I would imagine the OP would be auto-enrolled into whatever is the employer's pension scheme (presumably DC) for new joiners.

For example, they have no legal right to recover any
of the higher salary level they gave them to opt out.

I don't fancy the OP's future career prospects at the company if they instigate a below-the-counter deal - presumably it would formally involve the OP starting a new employment, and therefore, with the right to continuing LGPS membership extinguished - then reneging on it later.

Plu2370 · 15 June 2017 at 9:02PM

Thanks all for the replies, much appreciated.

Should have perhaps phrased the question as moving from the LGPS to my employers DC scheme. So this should negate any issues around auto-enrollement. Their contribution would be just a couple of % going forward so would make up remaining contributions via a private pension to take it up to current combined employee/ employer contribution of 30%.

The employer contributions are stated on my payslip each month which is where I got the 20% from.

Hadn't considered that it may be considered an inducement, my employer is unlikely to be willing if there is any risk on their part particularly if this is rarely if ever done.

I was hoping to also get some views on the relative financial merits of each option. Stick with the LGPS for the next 2 years and accrue c£2.7k of CARE pension in todays money in c40 years times. Invest total of £40k in DC pensions over the next 2 years, assumed growth of 3% above inflation for the next 40 years pot in today's money could be worth £125k. Key word is of course 'assumed' growth but there is potentially a sizeable difference in return. Also appreciate one is guaranteed the other has no guarentees. DC possibly makes an early retirement easier and with CARE you don't actually know when it will start being paid.

Opting out of DB pension scheme

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