Pension question

Ian_W

Mike,
You are quite right that the current scheme only came into affect in September 2006 and prior to that was a 1/60th pa final salary scheme according to this BOOKLET. So most, if not all, of the OPs service will be on that basis.

The norm on this forum is to almost always say leave it in the FS scheme and dunstonh has said many insurers are reluctant to take inbound FS transfers but in a situation like this the OP may be well advised to get a transfer value and seek advice from an pension specialist IFA.

One of the reasons why FS schemes are seen as valuable is that the employer takes the investment risk however where the employer is, potentially at least, not in great financial shape then given the limited [though welcome] protection of the PPF then the employee or deferred pensioner isn't without risk. Add to that the fact that the scheme only uprates by a max of 3% and I would have thought it would be at least worth asking?

Obviously the transfer value could be reduced by the fund deficit and we don't know when the OP retirement date is but would I be right in thinking that the OP may be being a little premature in thinking:

This really has took a weight of my mind!

Luckyjammygit

So in other words although I have paid in for over 25 years and have a statement of this being payable for life I can still get ripped off.

Just what I have come to expect these days.

Schnorbitz_2

MikeJones wrote: »

My other immediate observation is that Schnorbitz's comment is technically incorrect for a significant number of scheme members - although in fairness to Schnorbitz - it is a very common misconception.

So as not to re-invent the wheel, this text is sourced from the Pension Protection Fund website (the link is to 'Compensation' page):

Likewise, a majority of people with pensionable service before 6th April 1997 will 'suffer' in other ways because of the way that the PPF treats that part of the pension benefit; the more pre April 1997 service, the greater the disparity between what would have been paid by the defined benefit scheme (had it survived) compared with what would be paid eventually with by the PPF.

Nevertheless, and whilst the PPF does have its critics, it is very much better than nothing.

Anyone with a private sector defined benefit pension benefit and who has not reached their scheme's Normal Retirement Date would do well to spend an hour going through the PPFs website.

I have to say though, even with the documents and examples available on its website, I personally think the PPF could do more to point out its weaknesses so that people are adequately informed.

Schnorbitz's well-meaning comment proves the point, don't you think?

Well, it's nice to be well-meaning.

Yes, you are correct, there is a cap on pensions (that's £30,856.35 at age 65 at the moment) , and increases once people retire are only given in line with RPI up to 2.5% each year on benefits accrued after 1997, as well as the 90% (for people under normal retirement age). Also, if the scheme was contracted out of the state second pension (or SERPS as it was) before 1997, then the "Guaranteed Minimum Pension" won't increase between the date of the sponsoring employer's insolvency at the fixed rate, but again in line with RPI up to a maximum of 5%. In the pension scheme valuations I've done, it's this decrease in GMP "revaluation" for people that left schemes more than about 20 years ago and loss of generous increases in payment on pensions people have accrued before 1997 that can really cut down the amount that members can expect to receive at retirement.

As you can see, there are several different ways of reducing the pensions that the PPF has to pay, and they're not easy to explain. I suppose it's analagous to paying an excess on a car insurance claim. The head of the PPF, Partha Dasgupta, did say in the last issue of Professional Pensions that the 90% amount wouldn't be reduced. Take that to mean what you will.

But, Luckyjammygit, these pensions will still be payable for life. Only if the new sponsoring employer goes bust, you'll get the reduced PPF benefits instead. Try having a look at the relationship between Galiform and MFI on Wikipedia... it seems even more complicated than Luckyjammygit's pension arrangements!

Debt_Free_Chick

Schnorbitz wrote: »

Also, if the scheme was contracted out of the state second pension (or SERPS as it was) before 1997, then the "Guaranteed Minimum Pension" won't increase between the date of the sponsoring employer's insolvency at the fixed rate, but again in line with RPI up to a maximum of 5%.

But the differece between the "full increase" and whatever the PPF/Scheme pays is picked up by the State, so members will be no worse off, in relation to their GMP.

Regards

Schnorbitz_2

Debt_Free_Chick wrote: »

But the differece between the "full increase" and whatever the PPF/Scheme pays is picked up by the State, so members will be no worse off, in relation to their GMP.

Regards

Are you absolutely sure about that? I didn't think the state had the money for it, and it's not allowed for in the members' PPF website:

http://www.ppfonline.org.uk/web.chi/ppfstatic.html?a=7874&s=8444#6

We don't allow for it in valuations on the PPF's basis.

MikeJones_2

Debt_Free_Chick wrote: »

But the differece between the "full increase" and whatever the PPF/Scheme pays is picked up by the State, so members will be no worse off, in relation to their GMP.

Used to be called 'top-up revaluation'. The State picked up the difference in respect of any disparity in GMP caused if/when a contracted-out defined benefit scheme or Section 32 Buyout used a lower rate for GMP revaluation than RPI (most likely to happen because of preservation legislation). It used to paid by the State automatically (where it ever occured) at State Pension Age.

Top-up 'escalation' on the other hand, had to claimed by the individual, as far as I was aware.

I'd have thought it was a cost-neutral 'benefit' in terms of the PPF calculation - although it was factored-in to the formula required to be used in Pension Review software for calculating Loss Assessments.

Sorry for the use of technical jargon.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Schnorbitz_2

MikeJones wrote: »

Sorry for the use of technical jargon.

Oh, I like technical jargon. Although it's no wonder other people's heads spin with all this jargon. Mine does sometimes too, the first time I meet something new.

I see, so if, say, a member left a scheme as a deferred in 2006 and was due to retire 5 tax years later, and had GMP revaluing until state pension age at 4.5% p.a., if the RPI was bigger than that over the five years, the state would have made up the difference? Or is it more the section 148 revaluation you're talking about?

I'm still pretty sure that between a sponsoring employer's insolvency and a member's normal retirement age, the pension payable by the PPF would only revalue at RPI (max 5%).

If you have a link explaining top-up revaluation, I'd be grateful for it.

MikeJones_2

Schnorbitz wrote: »

Or is it more the section 148 revaluation you're talking about?

Yes. I hope I didn't throw you off track when I said RPI.

Schnorbitz wrote: »

I'm still pretty sure that between a sponsoring employer's insolvency and a member's normal retirement age, the pension payable by the PPF would only revalue at RPI (max 5%).

That's my understanding of how it works too.

Schnorbitz wrote: »

If you have a link explaining top-up revaluation, I'd be grateful for it.

If I can find one on the internet, I'll post it - but don't hold your breath. That type of detailed material is usually in the preserve of technical subscription services.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Debt_Free_Chick

Schnorbitz wrote: »

I'm still pretty sure that between a sponsoring employer's insolvency and a member's normal retirement age, the pension payable by the PPF would only revalue at RPI (max 5%).

Agreed - but the State would still be applying s148 revaluation right through to SPA and would still top up the difference between the "additional component" and the GMP.

And after SPA, the AC would increase in line with RPI, but the GMP would either not increase at all (pre 88) or only increase at a fixed rate of 3%. And the State would pick up the difference between the two amounts.

The additional component is precisely what SERPS would have paid. The GMP is a "SERPS mutant" which is only provided by occupational pension schemes and doesn't exactly mirror the AC calculation. The DWP calculates both the AC and the GMP so it can always calculate any difference and pay it with the State Basic Pension.

Schnorbitz wrote: »

Are you absolutely sure about that? I didn't think the state had the money for it, and it's not allowed for in the members' PPF website:

http://www.ppfonline.org.uk/web.chi/ppfstatic.html?a=7874&s=8444#6

We don't allow for it in valuations on the PPF's basis.

The State can always raise the money - through taxation Unless the Government reneges on its (pensions) promise and simply cuts back what's paid out (and it's done that, too )

The PPF valuations you do - is this the s179 valuation? Either way, if you're trying to calculate what the PPF would pay, then it wouldn't take account of the AC.

The PPF has not set out the detail of what happens with GMPs in its guidance - to be fair, this interaction between the AC and the GMP isn't set out anywhere, as far as know - except perhaps some of the very old DWP booklets from around 20 years ago.

You've made me wonder, though, if there has been some "back door erosion" of the total pension entitlement. If members of schemes in the PPF are actually going to lose some of their GMP and not have it topped up by the State, then the industry hasn't spotted that one! So .... I'm going to do some digging with our actuaries, administrators and lawyers ..... and directly with the PPF too!

I'll post back when I have the clarification, but it could take some time.

Incidentally - I'm a Pensions Manager and Secretary to the Trustees, responsible for 3 DB pension schemes. Like you, have "some contacts" I can tap-up for an inside track.

Regards

Schnorbitz_2

Yes, they are the section 179 valuations. I try to avoid using industry lingo as much as I can on here, but occasionally I can't help it: it's no wonder so many people feel so confused by pensions in general.

Incidentally, Debt_Free_Chick, (and here comes a jargon warning for everyone else) have you received any of your DB schemes' regulator returns for this year? There's a new requirement for "period life expectancy" and "cohort life expectancy" in the financial information section, which has confused every set of trustees who have come to us with help on them so far. Our valuation programmes and annuity calculators were set up to do either one or the other, depending on whether the last valuation used a calendar projection mortality table (in which case the two are the same) or a cohort improvement table (in which case they are different). It took a good bit of tinkering with a spreadsheet to get the right answers out.