Employer is offering me my pension?!!

big_thumper

Hi everyone,

I am an employee of a very large company, and was transferred to them from local government where I had a final salary pension. They put me in the equivalent scheme they had, and have been paying in ever since.

I guess they want people to leave, as it costing them a lot of money to run! I received a letter saying if I left the scheme, they would give me the following:
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I will be paid a cash alternative within my salary, upon leaving the scheme. I will get 15% of my salary from June 2013 until October 2017, then 14% until Sept 2018, and 13% after that on-going.
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I think I see this as a once in a life time opportunity to get out what I have paid in (Im 33, been paying since 18). On other hand, what if I live until i'm 100!! What a dilemma, I have tried to contact my employer to ask for more info, but nothing...

Guess I just wanted to share this with you guys, to see what your thoughts were and may be what you would do in my situation.

The alternative by the way, is to pay in 3% more than I am now, just for my terms to stay the same! All opinions welcome, John

hugheskevi

I am an employee of a very large company, and was transferred to them from local government where I had a final salary pension. They put me in the equivalent scheme they had, and have been paying in ever since.

That sounds like you had Fair Deal protection to a broadly comparable pension following the transfer of a function from the public sector to an independent employer?

I guess they want people to leave, as it costing them a lot of money to run!

Indeed, it may well be costing them employer contribution rates of 30% or more.

I think I see this as a once in a life time opportunity to get out what I have paid in (Im 33, been paying since 18).

You get out what you paid in when you draw the pension.

What you have is a once in a lifetime opportunity to trade a contractual entitlement to a broadly comparable pension for a salary increase.

In general, it is useful to ask yourself what your employer's motivations for making such offers are. In these sort of cases they are looking to either reduce costs, reduce uncertainty about future costs, or (usually) both.

As a general rule, what is good for your employer is bad for you, and vice-versa.

Unless you fully understand why the deal would be good for you (eg you think you have a low life expectancy, expect to be single all your life, and other such things which mean you don't get good value from the DB scheme) the best approach is to refuse.

The alternative by the way, is to pay in 3% more than I am now, just for my terms to stay the same!

You should have a contractual entitlement to the broadly comparable pension - it would be worth carefully checking your contract and what exactly it states about changes to pension arrangements (including contribution rates).

If you do choose to leave, your employer still has to provide a pension to meet their automatic enrolment requirements so you should find out what you would get from that when making your decision.

I have tried to contact my employer to ask for more info, but nothing...

Your employer will be cautious about giving you anything which may be construed as financial advice about your decision, so be clear about what additional information you would like.

big_thumper

Thanks hugheskevi, some food for thought there. I guess if I left their employement, my additional payments would stop and I would lose everything that had not been paid back to me so far then.

I best make sure they are not planning a restructure before taking that offer then hey!

bigadaj

As hugheskevi the companies motivation will be to save costs. So you need to compare like with like. So swapping currently would look like the company is saving around half their costs by you taking the deal currently offered.

They are probably relying on people thinking this is a windfall and grabbing the money on offer now. Ideally you could act as a group and negotiate the offer up, this is one area where union membership would be very useful.

The other complicating factor is that I would have thought that their commitment to maintaining the currents system wouldn't be indefinite, and they could reduce benefits at some point as they seem to be doing currently by increasing your contribution. Also as you are relatively young then the benefits are a long way off, and things change radically over decades.

Speak to your co workers and see what their view is, I think it will be difficult and in time futile to retain the db scheme and would be tempted to try and negotiate a better current figure at the moment.

hyubh

big_thumper wrote: »

I am an employee of a very large company, and was transferred to them from local government where I had a final salary pension. They put me in the equivalent scheme they had, and have been paying in ever since.

Presumably this involved transfering out of the LGPS completely, i.e. you have no deferred benefits in the LGPS?

I guess they want people to leave, as it costing them a lot of money to run!

Certainly.

The alternative by the way, is to pay in 3% more than I am now, just for my terms to stay the same!

What is your current contribution rate, out of interest? That said, the issue is less paying 3% more, than the fact this 3% probably won't safeguard the scheme in the long term anyhow, as others have said.

laurel7172

Forgive me if I'm wrong, but you seem to think that this is your past contributions being repaid to you.

It's not. The company is offering you a 15% pay increase to compensate for withdrawing your pension package going forward.

As a good final salary scheme seems to be valued on these boards at something like 25-30% of salary, this "pay rise" is actually a significant cut in your total pay.

Personally speaking, to hold on to a final salary scheme for as long as possible (I suspect other posters are right when they say even this offer won't be around for long), I'd pay the 3%.

redbuzzard

Laurel7172 is correct.

You keep the pension benefits you have accrued. The salary increase is a bribe to you to give up the right to future benefits.

One way to look at this is to compare what you are giving up with what say 15% contribution to a personal pension will buy you.

In my case, I was in a defined benefit scheme until 2010 when it was closed to future accruals. Up to then, every year I accrued 1/60 (1.67%) of my salary as annual pension at age 65.

The replacement scheme happened to be 5% from me, 10% from the employer into a defined contribution scheme. Using an annuity rate of say 3% for an RPI pension at 65, I would accumulate notionally 0.45% of my salary as pension at 65 for each year's contributions, about a quarter as much (ignoring growth and setting that against my annual revaluations on the defined benefit scheme - near enough as I was not far off retirement. Your "projection" would be better with some real returns, but not guaranteed and still poor by comparison).

So unless you don't really care about pension benefits for any of the reasons mentioned above, stick with what you have and pay the extra bit. Incidentally, it probably comes with life insurance as well, a benefit often forgotten.

Apart from the vast difference in projected benefit, your DB is in effect a guarantee - which you would not have in a personal pension or defined contribution scheme where the risk on investment returns, and eventual annuity rates, would be all yours.

xylophone

http://www.lovemoney.com/news/savings-investments-pensions/pensions/15924/code-end-cash-bribes-transfer-out-final-salary-pensions

jamesd

Both the pensions regulator and the Financial Conduct Authority have expressed concern that employees are being offered poor deals from schemes that pay them money to leave very valuable pension deals.

Don't be a sucker and accept. Pay the extra and be glad you have the opportunity to stay in.

Such offers can be a good deal for people who are close to retirement age with assorted forms of ill health. They aren't a good deal for people of your sort of age, except that they are a great deal for the company if they can get people to accept.

What they are doing is exploiting the ignorance of employees about the true value of the pension they are in.

zygurat789

hugheskevi wrote: »

As a general rule, what is good for your employer is bad for you, and vice-versa.

So, what is good for the employee is bad for the employer. Unfortunately what is bad for the employer could also be bad for the employee, culminating in closure and redundancy all due to excessive employee costs of pensions.

hugheskevi

So, what is good for the employee is bad for the employer. Unfortunately what is bad for the employer could also be bad for the employee, culminating in closure and redundancy all due to excessive employee costs of pensions.

Indeed, but I don't think this should be a factor in the OPs decision making and certainly not without knowing a lot more about the strength of the employer covenant. At the individual level, what is good for the employee is bad for the employer, no different to staff asking for a pay increase.

But it is unlikely to be very relevant in this case anyhow. Given it appears to be a Fair Deal case, the employer bid for a contract from a local authority in full knowledge of the pension costs and they will have been factored into the price bid for the contract. Given Fair Deal applies, it will have been fairly recent (post 1999).

Only a small proportion of the workforce are likely to be in the pension, and they may even be using a generic scheme such as Prudential Platinum. Although if they are a large employer they may well have their own scheme for Fair Deal people.

That is all why it is so important to check contractual details in this circumstance, it isn't like a usual case where an employer is progressing toward closure of a DB scheme which is going to happen sooner or later in all probability.