Pension at 50 problem

traineepensioner

Zelazny wrote: »

That seems a little disingenuous to me.

The benefit that you have is DB, and not DC. Thus they are able to calculate the benefit that you would receive at Normal Retirement Age and then apply an Early Retirement Factor to it to determine what you receive for taking the benefits early. There should be no change to the benefits payable at NRA, so any changes to the total payable now would arise from changes to the ERF.

Given that the change from RPI to CPI is likely to mean people receiving less increases once the benefit is in payment, and that if you put the benefit into payment earlier it means more time with less increases, I'd expect the ERF to change such that your benefits for an early retirement would be higher, and not lower.

That said, it is possible that the scheme previously applied ERFs that were significantly better than they should have been and that this has now been corrected, I suppose.

Either way, it doesn't seem all that fair to you

Hi Zelazny,

I'm also affected by the revised actuarial factors and totally agree with your logic.

I have been trying to get an explanation from the BT pension scheme administrators since June (peopleline.pensions@accenture.com) as to why the change from RPI to CPI would increase the actuarial reduction for early retirement. (If anything the total amount of benefits taken early is less with CPI indexation than with RPI)

I have received an acknowledgement to my emails but the administrators are unwilling to reveal the actuarial factors applied to early retirement and offer no explanation. They will only confirm that the extra pension reductions will be between 2% and 8% (depending on how early you retire).

The BT pension scheme ceased being a final salary scheme in 2009 and became a Career Average Revalued Earnings (C.A.R.E)...or Career Revalued Average Pension (C.R.A.P) ...Which is a defined contribution scheme.

chipsmum, good luck with your revised pension estimates. Mine were reduced by about £1000 per year....So I'm not leaving yet

Zelazny

chipsmum wrote: »

I do not really understand DB and DC or how ERF is calculated. Should I still request a breakdown of all calculations and run them by the Pensions Advisory service ?
I may be naive but assumed that with something as important as pension benefits, they would always be accurate....
Thanks for everyone's help and input so far.

Unfortunately, most schemes have rules written such that the ERF used is completely at the discretion of the Trustees and the Scheme Actuary. You can ask for a breakdown, but they'll not explain the reasoning behind the factors used, and as such it's probably not worth spending the time on.

If you could hold out until nearer the normal retirement age, the factors would have less effect, but that's about the only thing that you can do about it.

traineepensioner wrote: »

I have received an acknowledgement to my emails but the administrators are unwilling to reveal the actuarial factors applied to early retirement and offer no explanation. They will only confirm that the extra pension reductions will be between 2% and 8% (depending on how early you retire).

The BT pension scheme ceased being a final salary scheme in 2009 and became a Career Average Revalued Earnings (C.A.R.E)...or Career Revalued Average Pension (C.R.A.P) ...Which is a defined contribution scheme.

chipsmum, good luck with your revised pension estimates. Mine were reduced by about £1000 per year....So I'm not leaving yet

Good luck with your queries. I've worked in pension admin before and have never had any problem with telling people the factors that have been applied to their benefits, but as an administrator I had no say in which factors were applied. We were simply told by the Trustees and Actuary which factors applied, based on how early the benefits were being taken.

What I suspect has happened here is that the change from RPI to CPI has given the opportunity to revisit the factors, and the Actuary has been asked to take into account the fact that the scheme is significantly underfunded - so the factors have reduced the benefits available early for that reason. It doesn't seem all that fair, but I guess that's the way the scheme works - it provides a fixed benefit at the Normal Retirement Age and if you take it early, you get whatever they choose to give you.

Just for the record, CARE schemes (or CRAP schemes as you put it - I like the acronym ) are still DB, as the benefit is fixed based on your service and salary. DC schemes are those that have a pot of money put aside, but don't guarantee any particular level of benefits. CARE schemes are still very good value for most members, but those who get big promotions towards the end of their career will lose out as compared with a final salary scheme.

traineepensioner

Zelazny,

Many thanks for the additional information.

"Just for the record, CARE schemes (or CRAP schemes as you put it - I like the acronym ) are still DB, as the benefit is fixed based on your service and salary. DC schemes are those that have a pot of money put aside, but don't guarantee any particular level of benefits."

My understanding of the BT CARE scheme is that all individual pension contributions for the end of year 1 are increased by either RPI or % wage increase....whichever is the lower. Year 1 total pension pot is then is added to Year 2 contributions at the end of year 2 and the same formula increase applied.....continuing each year. The total contributions, including the yearly increases, are then used to calculate your pension. This means that to get a good increase each year both the wage rise and the inflation rate have to be significant.

To my mind this is a defined contribution scheme as I know what percentage of my wage is going into my pension pot but I haven't the slightest idea of how much it will be worth when I retire. BT do provide an on-line retirement planner which gestimates what you should get in X years time....but my projections have decreased since the CARE scheme started

BTW A large part of my pension is the old BT final salary pension which stopped in 2009 but continues to be tied to my pay until I retire. This is a defined benefit scheme as I know that I will get a fixed % of my pay on NRA.

If my understanding is incorrect please feel free to jump in....I would be relieved if someone could show me that the BT CARE pension is a good one

Bigmoney2

traineepensioner wrote: »

Zelazny,

Many thanks for the additional information.

"Just for the record, CARE schemes (or CRAP schemes as you put it - I like the acronym ) are still DB, as the benefit is fixed based on your service and salary. DC schemes are those that have a pot of money put aside, but don't guarantee any particular level of benefits."

My understanding of the BT CARE scheme is that all individual pension contributions for the end of year 1 are increased by either RPI or % wage increase....whichever is the lower. Year 1 total pension pot is then is added to Year 2 contributions at the end of year 2 and the same formula increase applied.....continuing each year. The total contributions, including the yearly increases, are then used to calculate your pension. This means that to get a good increase each year both the wage rise and the inflation rate have to be significant.

To my mind this is a defined contribution scheme as I know what percentage of my wage is going into my pension pot but I haven't the slightest idea of how much it will be worth when I retire. BT do provide an on-line retirement planner which gestimates what you should get in X years time....but my projections have decreased since the CARE scheme started

BTW A large part of my pension is the old BT final salary pension which stopped in 2009 but continues to be tied to my pay until I retire. This is a defined benefit scheme as I know that I will get a fixed % of my pay on NRA.

If my understanding is incorrect please feel free to jump in....I would be relieved if someone could show me that the BT CARE pension is a good one

The way my company CARE scheme works is that each year you accrue 1/60th of salary. This amount is pension (not pension contribution, or pension pot) This amount of pension is increased by inflation (CPI/RPI) after year one. Year 2 pension amount (another 1/60th) is added to year one, both bits then acrue inflation rise. So each year you accrue an amount of pension, not a pension pot, so scheme is still a defined benefit scheme.

Zelazny

traineepensioner wrote: »

My understanding of the BT CARE scheme is that all individual pension contributions for the end of year 1 are increased by either RPI or % wage increase....whichever is the lower. Year 1 total pension pot is then is added to Year 2 contributions at the end of year 2 and the same formula increase applied.....continuing each year. The total contributions, including the yearly increases, are then used to calculate your pension. This means that to get a good increase each year both the wage rise and the inflation rate have to be significant.

I've had a look at the BT schemes available, and it looks like you're describing section C of the BT Pension Scheme (http://btpensions.net/149/section-c) from 1 April 2009

Your analysis is nearly correct, except that it's not contributions that are amassed each year, but benefits of 1/80th of your salary in pension and 3/80 of your salary in cash

So if your salary in year 1 is £20k, you accrue:
Pension: £20k / 80 = £250 p.a.
Cash: £20k x 3 / 80 = £750

At the end of year 2, if your salary has gone up to £22k (a 10% increase) and RPI increased by 3%, the benefits would be:

Year 1 benefits increase by lower of 3% or 10% = 3%, so the new benefits are
Pension: (£250 x 1.03) + £22k/80 = £257.50 + £275 = £532.50 p.a.
Cash: (£750 x 1.03) + £22kx3/80 = £772.50 + £825 = £1,597.50

At the end of year 3, if your salary stayed at £22k (a 0% increase) and RPI was 2%, the benefits would be:

Year 2 benefits increase by lower of 2% and 0% = 0%, so the new benefits are:
Pension: (£532.50 x 1.00) + £22k/80 = £532.50 + £275 = £807.50 p.a.
Cash: (£1,597.50 x 1.00) + £22kx3/80 = £1,597.50 + £825 = £2,422.50

and so on.

What's unusual about this is that it applies the lower of test to RPI and Salary increase to determine the increase applied to previously accrued benefits. All CARE schemes that I've seen previously have just used RPI, usually capped at 5% p.a.

Over a long period, we'd expect to see salary increases in excess of RPI. If this occurred each year, the scheme would simply be giving RPI increases, so would be in line with other CARE schemes, but as it's not guaranteed it is likely that this would give a bit less than other schemes, but I doubt the difference will be that significant.

On the other hand, the increases are not capped at 5%. If RPI starts to get really high, so long as you get wage increases to match or come close, you'd be better off than those in "normal" CARE schemes.

Each year, if your salary increase is higher than RPI, you get RPI. If it's lower than RPI, you get whatever the increase in salary is. As mentioned above, we'd expect salary to increase more than RPI overall, so if we say 2 years in 3 you get RPI, and the remaining 1 year in 3 you get nothing, what difference would that make to your benefits?

I put the figures into a spreadsheet, assuming RPI at a steady 2.5% and salary increases at 0%, 4%, 4%, repeated. With a starting salary of £20k, at 10 years service you have a total pension of just over £3k and cash of just over £9k amassed, and for this you've paid a total of £14.9k in contributions (inflation adjusted).

So taking the cash off the contributions, you're getting a pension of £3k for less than £6k contributions. Alternately, the total value of the benefits you are receiving (if you were to purchase them on the open market, with annuities at a 5% yield) would be almost £70k, but you've paid less than £15k for them.

In other words, while you're contributing 6% of your salary to the scheme, the employer has to contribute somewhere in the region of 20% (in actuality it will probably be less than this, depending on investment returns). The employer contribution required does dip a little over a long time frame, but even if you were in the scheme for 40 years, they'd still be looking at about 18% employer conts.

I'd say that's not a bad scheme...

Incidentally, being the nosy sort that I am, I ran the numbers for 0 salary growth and 0 inflation. For 0 salary growth and inflation at a steady 2.5%, at 10 years you've got employer conts of about 19%, dropping to 11% at 40 years. For 0 inflation and steady salary growth of 4% per year, you get Employer conts of 22.75% each year, no matter how long you've been in the scheme.

traineepensioner

Bigmoney2, Zelazny,

Many thanks for your replies....You are absolutely spot on!.:beer:
...and humble apologies to the OP for slightly hijacking the thread, hope it wasn't too OT.

I made some enquiries at work today and found that the final sum is used to calculate the average wage for the 1/80th accrual ...not as good as the original but I'm a lot happier.

Thanks again