What now for Final Salary, Defined Benefit and Public Sector pensions?

xylophone

http://citywire.co.uk/new-model-adviser/budget-2014-govt-considers-db-to-dc-pension-transfer-ban/a741509

George is on the case apparently....

kidmugsy

xylophone wrote: »

http://citywire.co.uk/new-model-adviser/budget-2014-govt-considers-db-to-dc-pension-transfer-ban/a741509

George is on the case apparently....

It's not too hard to guess why Treasury officials have not come up with my idea of a "virtual" DC scheme, is it? George should hire me as his adviser: that really would be win-win-win-win-win.

bigadaj

It's an interesting concept to replace all db schemes even in the public sector. Replacement schemes would then actually have to be funded and from a government perspective that would be a problem as there is nothing they like more than promising something in the future when they aren't around, or have to deal with the fallout.

It would also allow a proper comparison of compensation in totality for jobs in a range of areas.

hugheskevi

I'd argue that the changes to DC decumulation have actually made public service pensions more valuable.

Think for a minute about what the key things you consider in retirement planning...(not an exhaustive list of course)

• Sufficient income/capital to meet your wants each year between retirement and death
• Income that is protected from inflation
• Income that isn't at risk of falling if markets do badly
• Protection against living longer than expected (ie don't run out of income/capital)
• Protection for spouse/dependants in event of death

It is reasonable to expect annuity rates to deteriorate (due to adverse selection, loss of demand and loss of scale and pooling) from their current position, so in future achieving a risk-free, inflation linked lifetime pension income will be even more expensive than now. For most, it will only be the State Pension which provides this type of guaranteed income except at a prohibitive price.

But public service pensions provide all the above.

And public service workers can contribute to a DC pension as well. Thus achieving a good index-linked pension from State and public sector pension from State Pension age which looks after their income needs, whilst using DC to be tax-efficient/fund early retirement/top-up the income or whatever.

In practice, most public sector workers will work in both public and private sector in their careers. That foundation of index-linked pension income will be a very valuable asset as it has features which cannot be replicated alongside the more flexible DC saving they have from private sector work and whatever voluntary pension saving they have.

As much as flexibility is valued, so is security and it shouldn't be undervalued - guarantees are very valuable.

kidmugsy

bigadaj wrote: »

It's an interesting concept to replace all db schemes even in the public sector. Replacement schemes would then actually have to be funded.

No, they wouldn't have to be funded if you ran them, in whole or in part, as a "virtual" scheme. You just say, for instance, that Fred's fund, which he wants 20% in gilts and 80% in a market-tracking ETF, will be calculated AS IF the fund had actually bought the ETF. Then, only when he retires, need the government hand over the money equivalent to his ETF. So it has all the properties of a DC scheme, except that (most of) the money isn't spent by the govt until Fred retires. It is, if I may say so, a ruddy brilliant idea.

hugheskevi

kidmugsy wrote: »

So it has all the properties of a DC scheme

Except for the rather key property that in a DC scheme the employee bears all the risk, and after the employer has put in money that is the extent of their liability. In this scheme the employer bears all the investment risk until employees retire.

The Govt's exposure would change in line with markets, so could easily move 20% or more each year. With pension liabilities in the trillions that is a big and volatile exposure. The change in exposure would routinely be larger than the current deficit.

BobQ

Tom2023 wrote: »

Say your family had a history of dying young?

Personally I'd like my entire Final Salary pot. I could then invest it and pass it on to my children.

So you are in good health but want to risk your DB pension based on your family history, taking no account of medical advances?

Does your DB scheme not provide your spouse and children with a pension too?

BobQ

Truthseeker wrote: »

There is no 'pot' in a defined benefit scheme!

But there is a transfer value available for the rare exceptions where it makes sense to use it.

atush

And those would be no spouse/dependents, and severe ill health

BobQ

xylophone wrote: »

http://citywire.co.uk/new-model-adviser/budget-2014-govt-considers-db-to-dc-pension-transfer-ban/a741509

George is on the case apparently....

I imagine that this will contravene some EU law.......