Final Salary Pension Change Proposed

philng

Company is proposing change to final salary pension as follows from next April:

Current:

Non contributory with pensionable pay limited to max 2% increase per year & benefits accruing at 1/60 for each year of service.

Proposed:

Non contributory with no pensionable pay increase in future but continued benefits accrued at 1/60 for each year of service.

Current pensionable pay is £39655 with 28 years service & current accrued benefit is £18651 at age 49. If I left scheme this would continue to increase in line with inflation anyway until age 60 when full benefit can be drawn.

I am aware the scheme is an attractive part of my benefit package but what would be the potential loss in future years by having pensionable pay restricted to current level?

My understanding is that the continued 1/60 accrual equates to around a £660 per year increase based on pens pay which equates to 3.5% probably better than inflationary increases and guaranteed (for now).

mania112

Very simply, the pension is calculated:

(years of service x 1/60th (accrual) x £xx,000 (final salary))

Normally the only thing known at the outset is the accrual rate, 60ths.

It seems you also know what your final salary will be, because it isn't going to change (note: will your fixed final salary increase by inflation, at least, in respect of the pension?).

Today, if you were at retirement your pension would be:

(28/60) x 39,655 = £18,505

If you retire at 65 you will hit the max service of 40 (normally 40 but could be less):

(40/60) x 39,655 = £26,436

Plus your state pension and any others AVC or other Personal pensions - this would be considered pretty good for the average man.

So the only 'hit' this new announcement has taken is that any new pay increases are not accrued into the scheme.

Alan_T_2

Philng... know exactly the changes you are going through, me too! £8+ billion costs on PPI reclaims is no problem (I think it was the right thing to do btw) and very little financial recourse to those involved, but spending £60m per year on a pension scheme for the 30,000+ staff who on the whole are just picking up the pieces from the various messes and wrong decisions.... must cut that out and make everyone feel valued!

As mania112 says the hit is any pay increases not going accruing into the scheme. I'm amongst the worst affected, in terms of age and service. I'm 38 and have 15 years service, so just snuck in before they closed the scheme completely.

The change from 2% to 0% cap, assuming payrises in excess of 2% per year over the remainder of my service, would result in a pension deficit of approximately £12000 per annum, and given I hope to have at least 25 years in retirement I'd be out of pocket by over £300k in the duration.

mgdavid

given it's non-contributory you should have ample opportunity to set up your own scheme in parallel to get you to the total figure you believe you will need (want?) to live on in retirement.

Alan_T_2

Sorry... missed the non-contributory part on the original post.

I actual contribute 4% to mine (always have based on the heritage within the organisation). I also pay into an additional 4% to AVCs to provide more funds for retirement, so I have been pretty responsible, however it would not be financially affordable, aged 38, to make yet further contributions that would eliminate, or even come close to, the shortfall.

opinions4u

Inflation will decimate that pension compared to previous "promises" based on final salary.

The 2% cap looks like it would have been a big hit. Cutting that to 0% is a very aggressive way to cap liabilities even further.

Lower your retirement expectations!

philng

Although it is a hit on final salary my estimate is that removing 2% pens pay increase to zero will for me have the effect of reducing accrual rate on existing pensionable pay from around 5% to 3.5% until retirement or pension is drawn.
This is based on continued 1/60 of salary accrual at fixed current pay as opposed to potentially 1/60 accrual on an increasing pensionable pay.
If I left the scheme altogether the accrued pension would increase by inflation which maybe more or likely less than the 3.5% I have calculated.

opinions4u

philng wrote: »

Although it is a hit on final salary my estimate is that removing 2% pens pay increase to zero will for me have the effect of reducing accrual rate on existing pensionable pay from around 5% to 3.5% until retirement or pension is drawn.
This is based on continued 1/60 of salary accrual at fixed current pay as opposed to potentially 1/60 accrual on an increasing pensionable pay.
If I left the scheme altogether the accrued pension would increase by inflation which maybe more or likely less than the 3.5% I have calculated.

Do you have to continue to contribute to achieve no increase in final salary, just extra years?

If so, is there an alternative money purchase scheme you could go into where your employer matches contributions? If so, what's the match?

When do you plan to retire?

How good is your health?

If you want to retire soon, I suspect staying in your existing scheme would be better. If your health is iffy, staying in may preserve access to ill-health retirement enhancements.

But if retirement is many years off and your employer will make decent contributions to a money purchase scheme then it may be better to bank the years you've done in the final salary scheme but participate any further.

All options are poorer than what you had before though. Not to worry, if this is LBG your chief executive will receive £2.3m in shares next week. Must make you feel a bit better!

MASSIVE DISCLAIMER: Do your own sums carefully. There's a lot of guesswork on my part here.

philng

Will be 49 in Jan 2014 & would like to retire by 55 at very latest. Scheme allows retirement from age 50 still. The option is to stay in scheme & accrue further years service with continued option of AVC & small extra contribution from company.
If you leave scheme can join a DC scheme with generous company contribution but currently the DB scheme is non contributory.
I am currently paying additional £100pm in AVC think co pays additional 5% but also tax & NI benefit & also pay lump sum into pension from annual bonus each year to gain refund of tax.
AVC & lump sum can be drawn down as lump sum on retirement without effecting main scheme payment.

atush

What is your scheme retiral age? What is the reduction per year for taking it early ie at 55?

philng

Scheme retirement age is 60 and think reduction per yr for drawing early is 4.7%.