Pension Advice needed (Maybe complicated)

pstones578

Would appreciate someone taking the time to read this and responding.

My mum has paid into a pension for 19 years to Cussons UK Ltd. There is a strong possibility that this pension may cease as it's in a large defecit and has been for the last 3 years. She is 50 and no longer works for the company that the pension is with. The company is starting a new plan and will contribute to the new plan i.e. for current employees but will be stopping contributing to the pension my mum is in once the current defecit is repayed. This is all according to the latest yearly statement she has recieved this week. She has also been told in her latest statement/letter that if the pension does fold that she may be able to claim compensation from the goverment. She cannot transfer the pension to her current employer as they have said that she is outside the 12 months period where this is allowed. She has narrowed her options down to the following.

A) Leave the money where it is and hope for the best.
Hope that the trustees will allow her to take early retirement at 50 with a tax-free lump sum and reduced pension, it will also incur a penalty for early retirement. This would at least guarantee her something back after paying in for so long.

Does anyone have any advice on what they would suggest she does. Also can anyone recommend any cheap/good professional advice that she could use. We are in the Manchester area. This matter is quite pressing and we would appreciate it if anyone could respond to this query.

EdInvestor

Check the arrangements protecting the pension here:

https://www.pensionprotectionfund.gov.uk

These people give good free advice:

https://www.pensionadvisoryservice.org.uk

dunstonh

A) Leave the money where it is and hope for the best.
Hope that the trustees will allow her to take early retirement at 50 with a tax-free lump sum and reduced pension, it will also incur a penalty for early retirement. This would at least guarantee her something back after paying in for so long.

There may be an option C and D depending on what the trustees intend to do. The move to a money purchase scheme may be enough to satisfy and meet future liabilities. It may be that they offer incentives to leave the pension and transfer it to a personal pension or Section 32 buy out bond or others.

Having a deficit that you consider large doesnt mean it will necessarily fail and seek funding from the PPF. Indeed, it appears from what you say that it wont fail.

jamesd

Does she want the income at 50? When does she really want to retire?

If she wants to retire at 60 she will also have the option of transferring the money to a personal pension in her own individual name. Then she can take an income from that when she retires, based on how the investments in it perform. The pension would no longer have any link at all to Cussons. An IFA could obtain a transfer value analysis for her to determine whether it looks financially reasonable to carry out the transfer. She would probably have to pay a fee for this service.

Do you think that she would be happy with the uncertainty and ups and down of investments in her own name instead of managed by a company?

The pension in her new employer would not be affected in any way by this.

This is not a recommendation. It's just a description of one approach that may be worth investigating at least as far as asking the Cussons scheme what they would pay. They get to decide and they can pay more or less depending on how keen they are to get people to transfer out. There's a real risk that they would offer less than the benefit of staying with the scheme, so it's not something to go with automatically.

MikeJones_2

Hi Peter,

I have several observations on the issue you've raised, and whilst they may be obvious for some readers, I've posted them assuming you're not that familiar with them - otherwise you wouldn't have asked.

pstones578 wrote: »

There is a strong possibility that this pension may cease...

If by cease you mean wound-up and all of the members' benefits secured outside of the scheme, then that would be costly for the sponsoring employer.

Assuming it is a defined benefit scheme, the trustees would look to secure individual policies for each member matching the benefits promised to members. Usually this is by way of a deferred annuity and this type of policy is very expensive.

Not only would the scheme have to match your mother's pension at her Normal Retirement Date, but they would also have to match any spouse's pension, pension increase during retirement and any guarantees such as a Guaranteed Minimum Pension or guarantee period (e.g. a lifetime pension but paid for a minimum of 5 years).

The trustees would require that the sponsoring employer stumped up the entire shortfall (if any existed) at the time that the scheme was wound-up. So, if the scheme was in deficit, the deficit PLUS any additional costs required to secure the deferred annuities would have to be paid by the sponsoring employer there and then.

Alternatively, some innovative products have appeared over the last couple of years where companies have formed to take over the pension liabilities of a defined benefit scheme. Some employers have taken this route to buying out the scheme: many are rumoured to be looking at it: and as many apparently perceive this course of action to be too expensive.

pstones578 wrote: »

...as it's in a large deficit and has been for the last 3 years...

I read this and wondered whether you had quoted the term 'a large deficit' from the employer's correspondence.

There are several ways to value a defined benefit pension scheme and the most commonly quoted method is based upon 'an ongoing basis'. This looks at the scheme's assets and liabilities and factors in the assumption that the sponsoring employer will be there to continue to fund the pension scheme. This is true whether the scheme is closed to new members or closed to all future accrual (the difference between the two is that in the last example there would be no active members).

In simple terms, if the scheme has more assets than liabilities, it is in surplus. If the other way around it, would be in deficit. Otherwise, it would be classed as fully funded – i.e. neither in surplus nor deficit.

When a defined benefit scheme is in deficit it has to notify The Pensions Regulator. The trustees are required to agree with the sponsoring employer a timescale and method of payment of additional contributions (over and above the normal contributions) to make good the deficit. This can take a variety of methods but a usual repayment plan would involve monthly additional contributions over say a 10-year period.

Remember, that the trustees have a difficult task in negotiating a repayment plan not least because they have the best interest of the scheme members at heart – but at the same time it would serve nobody’s interest to see the sponsoring employer founder because pension repayments were too demanding or unreasonably high.

A scheme’s solvency can also be measured in other ways too such as on ‘wind-up’ – the true cost of buying out all members’ benefits at a specific moment in time which as you can imagine would normally be very expensive.

Example:
A scheme is heavily invested in equities, the stock market has performed well, and other scheme investments have met expected returns. On an ‘ongoing basis’ the scheme solvency is valued at 103% - it has a surplus of assets over liabilities.

The stock market falls over the period up to the next valuation, and investment returns have been much poorer than anticipated resulting in an ‘ongoing basis’ value of 94% - i.e. the scheme’s liabilities exceed its assets and it is in deficit.

At the same time as doing the ongoing valuation, the sponsoring employer wants to look at winding up the scheme and obtains a wind-up valuation. This reveals a solvency of 71%, 23% worse than on an ongoing valuation - so that the employer would have to inject a considerable cash sum to buy out all members’ benefits.

The point here is to identify which basis you are being quoted. The wind-up basis is the ‘doomsday’ scenario for many employers – and for many is currently an unrealistic situation to consider.

Your mother’s ‘safety valve’, as others have commented is that if the sponsoring employer goes ‘bust’, there is the Pension Protection Fund which may (but not always) be there to back up the members benefits.

pstones578 wrote: »

...The company is starting a new plan and will contribute to the new plan i.e. for current employees but will be stopping contributing to the pension my mum is in once the current deficit is repayed...

As you can see from my previous answer – the sponsoring employer will have to continue to underwrite the cost of providing the pension benefits when they fall due, whenever the scheme is not fully funded. So, the employer’s commitment to the defined benefit scheme doesn’t cease just because a current deficit is eradicated. Future life expectancy may make today’s assumptions inaccurate – and mean that as pensioners live longer, more monies will have to be found to make good any funding shortfall.

pstones578 wrote: »

…Does anyone have any advice on what they would suggest she does...

Just to add to Ed’s comment, The Pensions Advisory Service can offer your mother guidance – but cannot discuss whether a particular course of action such as a pension transfer to a Personal Pension Plan or Section 32 Buyout, as this is a regulated activity.

pstones578 wrote: »

…This matter is quite pressing and we would appreciate it if anyone could respond to this query. ...

May I ask why this is pressing – has your mother been given a timescale on something?

Summary
Apologies for the lengthy response, but I hope this has helped.

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.