Problem with final salary scheme

danny_boy_4

I have a final salary scheme from an employer who I left 13 years ago. I got a quote that said that if I drew it in December 2002 I would get £6,720 pa. I decided to leave it for a few years to build up and have recently been advised that if I draw it as planned in April 2006 (A Day) I will only get £5,200 pa.I queried this with the scheme actuaries and they advise me that the Trustees and actuaries thought the the old basis of calculation was too generous so they now calculate the transfer value (no explanation how) and simply apply the appropriate annuity rate so that it is 'cost neutral' to the plan.
Can they do this when I have received a quote under the old basis and have every expectation that my pension will be 30% higher than they are now quoting . I estimate that it will cost me approx £70,000 compared to drawing it in December 2002.

Thanks to anyone who can help

deemy2004

Thats the problem with pensions, it appears they can get away with day light robbery....


Perhaps DD can provide some input ?

Pal

Unfortunately DD's not around but hopefully I'll do for now.

Firstly, Deemy is talking rubbish. The emphasis should be on the phrase "it appears".

Secondly, it seems to me that Danny Boy might be confusing his pension quotes.

Pension you have already earned in a final salary scheme cannot be taken away or reduced unless you are one of the few unlucky people whose scheme is winding up. Assuming that this isn't happening, once you have earned a pension it is yours unless you consent to it being changed.

Two possible scenarios:

- They quoted a transfer value of £6k which has now been reduced to £5k because the scheme is now underfunded (hence the transfer value is "cost neutral" to the remaining members of the fund). This will only impact you if you transfer out. If you leave the benefit where it is, you will still get the pension you were originally promised when you left the scheme. You should have a statement showing this, if not ask for a replacement. In practice transfer values are market related so they will fluctuate up and down over time anyway. It makes no difference to the pension you will get, it only reduces the transfer value if you take the money out in order to stop you taking more than your fair share of other member's funds.

- Alternatively, the first quote is an annual pension that included an assumed rate of increase between date of leaving and your retirement i.e. they guessed that RPI would increase at 5% p.a. until you retired and quoted the pension on that basis. If they have recently started assuming a reduced RPI rate (say 3%) or have simply stopped providing projections altogether (a wise thing in my opinion) then the pension figure at retirement will appear to have fallen. However the actual pension you get at retirement would always have been based mainly on actual RPI from your date of leaving to date of retirement, so although the projection has changed, your pension entitlement has not altered at all.

If neither of the above is correct then the situation you describe appears to be breaching all sorts of pensions preservation legislation and you should complain immediately (and also let me know how they did it).

deemy2004

Pal wrote:

Unfortunately DD's not around but hopefully I'll do for now.

Firstly, Deemy is talking rubbish. The emphasis should be on the phrase "it appears".

LOL ...Would not be the first time ......... if it were so

But Danny Boy is saying that had he taken his pension i.e. retired in Dec 2002, his pension would have been £6,700.. Now he is being told that by delaying his pension by just over 3 years his actual pension drops to £5,200 when infact any sane person would have expected it to have gone up !

That's how I am reading Danny boys post.....

Pal

That would be illegal, which is why I figure he must be reading the figures wrong or talking about transfer values, which do vary over time.

dunstonh

I'm here now - not that you need me. Plus when it comes to occupational schemes Pal knows more than I do anyway!

In addition to Pals options, could it early retirement penalties have been enforced? I know some occupational schemes that didn't apply the early retirement penalty during the overfunding days but now do.

Are you sure it is final salary and not money purchase?

Pal

dunstonh wrote:

In addition to Pals options, could it early retirement penalties have been enforced? I know some occupational schemes that didn't apply the early retirement penalty during the overfunding days but now do.

Interesting idea. More likely is that the scheme has moved from using "standard" early retirement factors (x% reduction for each year early) to a process of using transfer values and annuity rates to calcuate an entirely cost neutral early retirement reductions. For reasons too complicated to go into the latter would be much harsher than the former, resulting in a lower early retirement pension. This is designed to protect the scheme's funding for the remaining members. This is something that was floated around a few years ago but I wasn't aware of any schemes that had actually gone ahead with it.

If that is the case then the answer for danny boy is not to "retire" early, and instead wait until his normal retirement age under the scheme when he will be able to take his full benefits without any reduction.

Are you sure it is final salary and not money purchase?

No, but the phrase "I have a final salary scheme from an employer.." tends to bias my thinking.

dunstonh

I know he said that but how many times have we see someone say something only to find out afterwards it isnt what they said.

Pal

This is true, but personally I have enough problems answering some of these questions without assuming that everyone is lying to me

Cheers

Pal

Debt_Free_Chick

My view (FWIW) ... it looks like the trustees have changed the early retirement, as already suggested. The actuaries have admitted that the new terms are "cost neutral" to the fund. It would seem that the previous basis was more generous, so that early retirements were a strain on the scheme's finances.

Early retirement terms are not usually contractual. The Rules will normally state that the member gets whatever terms the trustees provide, following advice from the actuary. If the previous terms were generous, then there is a possibility that the scheme's funding deteriorates. As the trustees have a duty to act in the best interests of ALL members, then allowing some to have generous early retirement pensions, whilst reducing the security for members who have not retired, is clearly questionable.

DannyBoy's entitlement is to a deferred pension payable at Normal Retirement Age. Early retirement is an option only (i.e. he doesn't have to take it) and then on whatever terms the trustees decide are reasonable. In pensions law, the early retirement pension must reflect the value of the deferred pension that would have been paid at NRA. The actuary's suggestion that the deferred pension is converted to a transfer value and then converted to an annuity, would seem (on the face of it) to satisfy this.

It seems that the only "complaint" is that the previously generous terms are not now available. However, it is a "complaint" that will not succeed, as the trustees appear to have acted reasonably.

HTH

danny_boy_4

Thanks for the replies particularly from Pal and Debt Free Chick.
It is definately a final salary scheme and the trustees have obviously implemented this 'cost neutral' method as the old basis was too generous.
My objection is that,not having heard anything to the contrary, I had every expectation of receiving 30% higher than they are now offering. I accept that I can wait until NRA but feel hard done by as I want to draw the funds earlier.

thanks for your help