Gutted! Work are closing the Final Salary Scheme

LillythePink

Found out this week, that the firm I work for are closing the final salary pension scheme.

We have the choice of:

Staying as a deferred member
Transferring our pot out to the DC scheme (with a sweetener)
Transferring out pot out to a PPA or RATS

The sweetener is generous - they will add 30% of your value and pay increased contibutions to the DC scheme for 5 years

With over 23 accrued years service, it's a nice pot to have but it means lots of thinking to be done as to what to do!

Loughton_Monkey

LillythePink wrote: »

Found out this week, that the firm I work for are closing the final salary pension scheme.

We have the choice of:

Staying as a deferred member
Transferring our pot out to the DC scheme (with a sweetener)
Transferring out pot out to a PPA or RATS

The sweetener is generous - they will add 30% of your value and pay increased contibutions to the DC scheme for 5 years

With over 23 accrued years service, it's a nice pot to have but it means lots of thinking to be done as to what to do!

Sorry on the bad news! Still. Good things cannot last for ever.

Now I am assuming you still have a lot of years to work (based on the 23 years service).

Since my own position was somewhat similar to yours, I can best answer you by reference to actual figures.

I left a company, with 21 years service of "Final Salary". So this is a very similar case to yours. Now I can quote you true figures (with the exception that I have multiplied both figures by the same secret 'fudge factor' to keep my actual pension value personal).

When I left, I could have taken my 21 year final salary pension rights as a cash transfer value (just as you are being offered, except you are being given 30% enhancement).

My value was £158,466.

When I actually started taking the pension 16 years later, it was worth precisely £776,204.

Both figures are accurate to the £1 - with the exception that each figure is the same exact ratio to my actual figure that I prefer not to reveal publically.

This represents an annual compound growth of 10.44%. No a couple of minutes on the spreadsheet tells me that if they had enhanced the value when leaving, by 30%, then it would have represented precisely 8.64% annual compound growth.

Now getting a net, consistent, 8.64% compound growth, after charges, is in my opinion 'pie in the sky'. 7% before charges (as per sensationalist Panorama the other night) is normally considered 'pushing it'.

Just to help you further, I spent another couple of minutes on the spreadsheet to work backward. I asked myself the question "What enhancement would I have needed if I could 'only' get, say 6% compound growth after charges". The answer was 92.6%

OK, please understand that my figures are totally accurate, but reflect the last 16 years. You have to make a decision for the next X years, when the financial climate may be totally different.

But it screams at me that you should say to your employer. "Thanks. But you are having a laugh. I am staying in the Final Salary Scheme. If you want to get me out, then please quote a figure in excess of 100% enhancement to the current cash value."

Spongebob_Nopants

LTP - I'm no expert on this but have had a bit of experience looking at these "defined benefit" schemes....

... I'd advise you (if you haven't already) to check the terms of your existing scheme carefully - many of them are "60ths" schemes, which means that for each year's service you give you will get 1/60th of your final salary - often up to a maximum of 40/60ths (ie 2/3rds).

In other words, the maximum pension you could have got would've been two thirds of your final salary if the scheme had stayed open.

If the scheme shuts, but you remain a "deferred member", it sounds like you may have already got 23/60 racked up - that's only if it is a "60ths" scheme, so you need to check. You also need to confirm what the "final salary" measure used would be - most likely it will be your salary at the date of the scheme closure, but then rolled forward for inflation - so you also need to check what inflationary factors are built into the scheme. (I think some of these factors can be altered by the trustees of the scheme, it would be worth finding out what's nailed down and what isn't - but remember that the trustees have a duty to act in the interest of the pension beneficiaries and not the company, so the trustees should not make decisions that benefit the company to the detriment of scheme members).

It also depends on how far you are away from retirement, and also if you have any information regarding the financial health of the scheme and the company (eg if the scheme is millions under water and the company on shaky ground, you may be better off getting your cash out - I can't remember what sort of gov't guarantees there are behind these schemes if any, you should probably check).

Final point - about 15 yrs ago (when I used to be an auditor) whenever I came across companies that offered DB schemes I was flabbergasted that they still ran them and still alllowed new entrants - because the schemes were SO generous and put all the investment risk on the company. So you are very lucky that your scheme has lasted as long as it has - like the previous reply, I'd be surprised if any enhanced transfer value offered would be enough to make it a better option than just keeping the cash in the DB scheme.

jamesd

What you need really is the assistance of an IFA with pensions qualification to find out whether the transfer value is fair.

The long term average return for the UK main stock market is over 10% after inflation and funds paying that are available with charges of under 0.3% a year and it's likely that the work DC scheme has such a fund available, as well as others. Loughton Monkey's value seems to have increase by pretty much the average expected amount.

There's some merit, even if it doesn't look best, and it might, to keeping in as a deferred member and having the new money in the defined contribution scheme. This way you're hedging some of your risks by leaving the deferred scheme trustees to do some of the work.

What I assume your work will do is sell the defined benefit scheme to an outside company that becomes responsible for it. They might not, but it's common. If they are planning to do this, I think personally that it makes it more likely to be better to transfer.

Loughton_Monkey

jamesd wrote: »

What you need really is the assistance of an ISA with pensions qualification to find out whether the transfer value is fair.

I think you mean IFA?

jamesd wrote: »

The long term average return for the UK main stock market is over 10% after inflation and funds paying that are available with charges of under 0.3% a year and it's likely that the work DC scheme has such a fund available, as well as others. Loughton Monkey's value seems to have increase by pretty much the average expected amount.

!!!What???

I think you have made a decimal point error, or have the wrong end of the stick.

My figures, as stated, are over a fixed 16 year period. During that period, the FTSE100 index grew from 3037 to 5134. That's 56% overall for the whole period. Now we all know UK Equity Pensions at best, might slightly outperform FTSE, but let me get this straight. You are saying 10% a year over and above inflation. 10% a year for 16 years is a growth of 360%. Inflation over this exact period was 51.7%. So compounding this, we get about 600%.

Tell me the pension fund manager who has produced 600% over this period - after charges - and I will bite his hand off. I think you mean nearer 60% - which is a compound annual rate in the order of 3%

[Look at the Panorama thread. Even though the BBC deliberately wanted to be sensational, and they wanted to exaggerate the problem, dared only go up as high as 7% gross - possibly getting 5.X% net. There is general support that they went so ambitiously high because it exaggerated the actual £ notes taken in charges. Had they used your figures of 10% plus inflation then they would have been laughed out of court.]

The main reasons why even a 'frozen' pension, like mine, and the OP's will grow is 1. Because of required additional contributions to meet the required escalation as defined in the scheme rules, and 2. additional contributions required to cover improving mortality. [No pension scheme she could transfer to would give any inflation protection or cover her for improving mortality. Yet these can be very expensive items]

jamesd wrote: »

There's some merit, even if it doesn't look best, and it might, to keeping in as a deferred member and having the new money in the defined contribution scheme. This way you're hedging some of your risks by leaving the deferred scheme trustees to do some of the work.

I don't think she has any choice about the new money going into defined contributions. But leaving the Final Salary where it is, is much more than a 'hedge'. Even if it doesn't grow quite as much as mine did. The point is, the company's actuaries will know very well the true cost to the company. This will have frightened them, which is why they want employees to see the miserable 30% as 'generous'.

I can guarantee to you, that the company concerned will be absolutely delighted for everyone who signs that 30% acceptance. For it means (for them) and extremely cheap closure. They will know that those who choose to stay in the scheme - even though it is frozen - will cost them an uncertain amount, probably between 60% and 150%.

jamesd wrote: »

What I assume your work will do is sell the defined benefit scheme to an outside company that becomes responsible for it. They might not, but it's common. If they are planning to do this, I think personally that it makes it more likely to be better to transfer.

They may well outsource it. This has absolutely no bearing on the issue at all. Government-backed guarantees will be identical. The final payout will be identical, since they can do nothing other than follow the scheme rules and pay the defined benefits. Service may (or may not) suffer slightly, but let's face it, there is very little servicing to do.

Loughton_Monkey

Spongebob_Nopants wrote: »

Final point - about 15 yrs ago (when I used to be an auditor) whenever I came across companies that offered DB schemes I was flabbergasted that they still ran them and still alllowed new entrants - because the schemes were SO generous and put all the investment risk on the company.

Very true. It also places considerable inflation risk, and also the full mortality risk. On the assumption mortality continues to improve, it is a sad fact that money purchase pensioners - however well their pension fund does - cannot escape the fact that their good money will buy a much smaller pension (per £ in fund) than it does today.

Defined benefits customers are fully protected. [There is a specific year when my 'Transfer Value' leapt by a staggering 25%. The primary reason for this was that they had to lower their mortality assumptions (the implied annuity rate)]. An adjustment of an annuity rate, say, from 6.5% down to 6%, will kick up the fund value by 8.3% all on its own. OK, in 'Final Salary' that doesn't affect your annual pension, but up goes your 25% tax free lump sum by 8.3%. Lovely!

jamesd

Loughton Monkey, I wrote about the UK market, not just the FTSE 100 part of it. Did you use the index, or the total return including dividends? Panorama may have used 7% just because that's a common value used for pension projections.

See figure C.9 of Appendix C of the First Report of the Pensions Commission. That gives the mean real (after inflation) return of UK equities for five year periods as 10.4% between 1977 and 2003, with 11.5% as the median. If you'd like to be more cautions you could use the figure for all five year periods from 1899, which they report as a mean of 5.7% and median of 6.5%. For a UK tracker a TER of 0.27% or less is obtainable even by individual retail investors.

So yes, I did mean over 10% after inflation.

I agree that 30% isn't expensive for the company to get rid of its risks, from market fluctuations to longevity. It's possible that it's related in some way to how much a buyout company wants to be paid to take on the obligations. Would be useful to know if it is, and how.

For a sale to a third party, there are also non-guaranteed amounts that could change, like discretionary payment of 5% or RPI instead of the minimum required by law, regulation and the scheme rules.

There's also risk tolerance of the individual and their other resources to consider, so it really requires an IFA to do a proper job of making a recommendation, even though staying in is likely to be the best choice for most people.

JasX

Here is a thought, with interest and annuity rates currently depressed will the 'value' of the transfer value currently be inflated to deliver the same benefit? will the company quote some old figure quoting long term average annnuity rates (which IMO are unlikely to ever be seen again with everyone living longer....) again needs a properly qualified IFA to analyse and comment on your specific offer and circumstances (and not one thats going to see a huge pension pot and concoct some advice that churns out high commission for them).


Maybe I'd better look at upping my FS scheme contribution option while its still open....

MrChips

I know a company who are doing exactly the same as what you are talking about - but I didn't think it had been announced yet. Which company do you work for if you don't mind me asking? It isn't in "logistics" is it?