Change from DB FS to Career average ?

C_Mababejive

Heres the scenario..

A person has been a member of a company DB/FS pension scheme and has around 30 years service. The scheme is well funded and is of the final salary, 40/60ths variety.

The pensionable salary has been subjected to RPI increases for some years and in other years, it has been increased via flow through from typical annual pay increases.

It may be suggested that the scheme will be migrated to a career average scheme with benefit accrued to date protected. The accrual rate is not yet known as no details published.

My initial thoughts are that if the company are proposing it then it must be good for them and not good for me. Call me cynical..

However having done some reading, i also think that there might be a bit of future housekeeping and that someone like myself who only has perhaps just over 10 years to run before i can retire,would not see detriment and may even see benefit over the DB FS scheme.

Essentially all i want is to retain the same benefits of the existing scheme or if im lucky,do a little better.

I dont want to be ripped off especially when the scheme is well funded.


Thanks for feedback from the pension gurus

atush

First of all, if it is to their beneifit, it could also be to yours- in that they keed the DB pension open to you. The other option is to close it to you.

Second, CA can favor those slow and steady employees (or at least not disadvantage them) the ones who take a hit are those who get promoted to high managerial positions at the end of their career and therefore get a huge pension boost.

redbuzzard

This happened to me too. Eventually the DB scheme closed altogether, which had a much nastier effect on my pension prospects. Atush is right, keeping a DB scheme now is a win in itself.

The move to CA is to reduce risk to the scheme. As you have probably worked out, on its own it's likely to be fairly neutral for people who are on a steady salary increasing roughly with inflation.

The biggest losers will be younger people, lowish paid but with good expectations of reaching a well paid job in the company.

The scheme rules almost certainly mean that your existing accrual will be held, and based on your current-ish salary - maybe the best of your last three years before the cut off, which is what happened to me. That will then get revalued year by year on some basis until retirement, probably linked to RPI with a cap of e.g. 3%, or 5%. That will be governed by the scheme rules pre the proposed change.

That could have a big effect if your salary increases in excess of inflation - because under final salary those years would have been worth more. Conversely, if you end up in a lower paid role towards the end of your career, you will do better under the new scheme because your accrual to date has been fixed in £ terms, not just years.

Check for other changes. Some schemes have moved from RPI to CPI for revaluations. The scheme I was in didn't, only because the trust deed and rules didn't allow it! Another common change is to lower the cap on revaluations or increases when in payment (usually of future accruals, because it's harder to take away what you already earned) e.g. from 5% p.a. to 2.5% p.a.

Chances are there's nothing you can do about it other than understand it. If you are in a very strong negotiating position you might be able to get a "secret" pay rise by making a fuss - I know of one or two who did that.