Final Salary Pension Closing

232607

Approx 6 months ago we finished our DB scheme & moved to a DC and as part of our consultation process I was part of a 10 person team representing the interests of approx 400 staff.
I'll give you the benefits of my wisdom now that the process has finished:-
While I understand that this is becoming common place, it feels like have had a significant reduction in my benefits/earnings package.
The proposal has been given with no indication of increased contribution, payout or other.
Therefore this seems like a simple reduction in my payment.
It probably is but its too simplistic to say the DC is not as good as the DB because the company is not putting in at the same level as they did in the DB.

A DB scheme is generally very inflexible if you want to go early, say 60 ish because the penalties are usually high. Also the communeration rates are often poor if you want to take your 25% tax free pot meaning this becomes unattactive.
A DC scheme is a pot of money so no problem taking your 25% and for people with a solid amount of years in the DB scheme it can be a good move in my opinion.
In short - The combination of solid years in DB (say 20 years +) and say 10 years + to build up your DC pot is the optimum conbination to have.
Also bear in mind your contributions to the DB scheme are fixed and you can't vary these.
In the DC scheme you can slam in 100% of your salary up to £40K and for anyone close to 55 who has significant saving they can live on up to retirement, this is a very wise thing to do.
Does anyone have advice for counter proposals or examples of companies who have dealt with a movement away from a DC scheme in a different way?
If your companies going through the consultation process are they addressing every worker or are you forming a worker representation group?
If it's the later make you put the right people in the group. Don't put people in who just want a break from their normal working day. Put forward people whao are:-
1. Strong minded enough to stand their ground.
2. Articulate and intelegent enough to get across counter proposals in a constructive manner.

It's almost certain you won't be able to prevent the DB scheme from closing. Rolls Royce is the only company I know where the workers prevented this and even then the DB scheme was "watered down".
Your focus should be on getting better terms from the new DC scheme & we managed to do this in a number of area's.
Also if you are forming a workers consultaion group, ask the company if they can have time set aside from their normal work so they can research pensions and answer staff question.
My company were good in that respect and told us to take as much time as we needed.

Just some tips on what you may argue for with the new DC. Not totally conclusive, you'll need to decide what you want to argue for.
1. Salary sacrifice if not already done so.
2. Employer NI savings from salary sacrifice forgiven and added to people DC contibutions.
3. Pension payments based on actual pay not basic. This was something we got and was a very big + for shop floor workers who traditionally work a lot of O/T.

PS...In our old DB scheme the company put in 27.5% to our 5%.
In the new DC it's 15% to our 5%

All the best & good luck!!!

kidmugsy

232607 wrote: »

2. Employer NI savings from salary sacrifice forgiven and added to people DC contibutions.

If they won't agree to that ask for half-and-half (or the like). The argument there is that when the employer incentivises employee contributions (through SS) by handing over half the employers' NIC saving, he increases the chance of NIC savings for himself.

Daniel54

greenglide wrote: »

This will normally require a change in your contract of employment.days/QUOTE]

Are you sure about this.I thought in most cases employer pension provision is an employee benefit,the details of which are non contractual

When my private sector DB scheme was closed 7 years ago,I checked my contract which said the employer would provide a pension,but did not detail what that pension would be.It was confirmed in the consultation process that there was no contractual obligation for the employer to maintain the scheme unchanged

In the consultation process I would suggest the OP also obtains comfort that the employer has plans to ensure the DB scheme is fully funded,assuming it is currently underfunded like most such private sector schemes

Top end for matched contributions in the replacement DC scheme were 8% employee and 12% matched,although this was age related

NotSkint

My employer closed our DB scheme (we all became deferred members) and moved us over to a DC scheme last year as the DB scheme was unsustainable for the company.
They de-recognised the Union before doing so and created an employee forum "which was more representative" as we had under 40% union membership. Therefore our "consultation" was more; this is what is happening, take it or leave it.
Under our DB scheme we paid in 7% of salary (for an 80ths scheme + lump sum at a retirement age of 65 (this was upped from 60 a few years previously)
Under our new DC scheme our employer pays in 1.5 x employee contribution up to a max of 10.5%.
The standard start up for the DC was for us to continue paying 7% and for the company to pay 10.5% (17.5% contribution in total). We can contribute via salary sacrifice.
The things I learnt from the process;
1) Be pro-active with your DC scheme. I have upped my contributions from the 7% standard to 20% (giving a total 30.5% contribution into my DC scheme). It is your pension pot and only you can work out how large you require it to be for a comfortable retirement.
2) Research the default funds that your DC contributions purchase and decide if they are what you want. The default fund for my DC pension at start up was a lifestyle fund, which didn't suit my particular appetite for risk; as I already had a number of years "banked" in a DB pension, I was willing to have 100% exposure to the equity market.
3) Plan for your retirement. With a DB pension it is too easy to ignore the options. A DC scheme gives you more flexibility. Perhaps you want to retire earlier? I personally am making use of S&S ISAs as an alternative savings wrapper for my retirement and am hoping to retire at 55.

kidmugsy

NotSkint wrote: »

as I already had a number of years "banked" in a DB pension, I was willing to have 100% exposure to the equity market.

Yes; some time ago I decided to view a DB pension as equivalent to an investment in corporate bonds.

NotSkint wrote: »

A DC scheme gives you more flexibility. Perhaps you want to retire earlier?

Every cloud ....

BobQ

greenglide wrote: »

It is not a "pay cut" it is (generally) a reduction in the value (to you) of the overall remuneration package.

Pedantic but correct. It is a cut in the remuneration package the OP receives.

If you have no use for spouse / partner benefits and the scheme is not very generous the change may be cost neutral to some people (although most will quite rightly see it as a real reduction in future benefits).

Or it may not be since you have no idea how valuable it is to any present family members or indeed future ones.

header

Wow! Never in my wildest dreams did I expect to get so much feedback! Thanks everyone!

The message I'm getting is:
1. Preventing the closure of the DB scheme will be difficult, if not impossible. (I still wonder if it is worthwhile fighting for, as this is what most of us woudl prefer)
2. Be informed, and fight for the best DC scheme

In our case the DC scheme is already running, and has been taking new employees for a number of years now. So it is difficult to change the terms of that - particularly as the employer has just negotiated terms with a new provider.

But I wonder about transitional contributions, to ease the pain a bit.

The sweetener was an additional contribution from employer starting at 10% and reducing on a sliding scale to zero over about 8 years.

That is more interesting, and better than what we are getting.

Also, there are things called buy-ins. I know little about these, but our employer's aims are to reduce risk, and buy-ins appear to reduce risk while potentially leaving the scheme open. Anyone have any experience on these?

BTW: Agree - our employer has confirmed no change in contract is planned, "just" a change to benefits.

atush

Option 2, and your attempt to get the best terms possible is your best chance really

Debt_Free_Chick

header wrote: »

Wow! Never in my wildest dreams did I expect to get so much feedback! Thanks everyone!

The message I'm getting is:
1. Preventing the closure of the DB scheme will be difficult, if not impossible. (I still wonder if it is worthwhile fighting for, as this is what most of us woudl prefer)

Likely to be impossible to prevent. Even fighting is likely to be futile. You can bet that this decision is not simply a whim and that your employer has spent much time & money debating this and getting advice. The simple reality is that this scheme is now costing far more than anyone ever anticipated. As an aside, it also means that the value to you, as part of your total package, is almost certainly far more than it was when you first joined. Whilst I understand you see this as a cut in your total package, I'll stick my neck out and suggest it's more of a realignment (some might call that pedantic - I prefer to suggest it's "precise")

2. Be informed, and fight for the best DC scheme

Employers generally benchmark their pay & benefits against their peer-group. What sector do you work in? In banking, expect an employer contribution of c10%; in retail, halve that (or even less)

Do not "fight" for an employer contribution which is at least equal to the current contribution to the DB scheme. It would take a much longer post to explain why, which I'm happy to do separately, but just for now - the two are not comparable. Benchmarking against the norm for the sector you work in is the way to go.

But I wonder about transitional contributions, to ease the pain a bit.

That's possible, but transitional contributions which are higher than the norm are usually targetted towards those closest to retirement. The reason being that they have less time (to retirement) in which to absorb the change in strategy.

Also, there are things called buy-ins. I know little about these, but our employer's aims are to reduce risk, and buy-ins appear to reduce risk while potentially leaving the scheme open. Anyone have any experience on these?

Yup

The (DB) pension you've been promised requires ongoing funding, with the vast majority of that funding made by the employer. Funding is a delicate balance and is a complex "reserving" calculation. This means that the company's funding requirement can vary, with future increases by no means ruled out.

A buy-in means that the pension scheme transfers the pension promise to an insurance company. So the price of the pension promise is fixed now, with no future uncertain funding requirement. The company may need to pay a one-off contribution now to secure the buy-in - but future funding is eliminated.

What does this mean for you? That your DB pension promise is secured with an insurance company (with all the regulatory control around that) and no longer dependent on your employer finding the money to fund that promise.

For companies with a flaky future outlook, the buy-in can be an improvement for members like you. Even if you work for a financially strong company, the buy-in is at worst, marginally better as the impact on your pension is better if you remove the risk of your employer going bust, no matter how small that risk might appear to be.

Hope this helps

NotSkint

The company I work for was also running a DC scheme in parallel to the DB scheme, as it had closed to new members a number of years previously. However, when they closed the DB scheme (making us deferred members), they opened a new DC scheme just for ex DB members, which gave slightly more favourable terms than the other DC scheme. So you may still be able to negotiate a bit. We also had a very small lump sum added to our pots as short term compensation for the extra NI contributions we now have to pay due to no longer being contracted out.
Bear in mind that your company is likely going to be contributing significant money into the closed DB scheme for years to come, in order to be able to pay out the preserved benefits, which you won't see directly now, but will benefit from later. It is an unfortunate fact of life that DB schemes are just unaffordable these days.