Two real pension eye openers

Thrugelmir

asavory wrote: »

The trustees clearly believe that, under the new rules, they have the right to remove pensioners from company pension schemes in order to save money,

Not a question of saving money. There may well be issues with the scheme not having sufficient assets to fund future liabilities. The longer interest rates remain low and by default gilt yields. Then many schemes may simply fail in the future. Old DB pension schemes have enormous deficits to shoulder even now.

asavory

Thrugelmir wrote: »

Not a question of saving money. There may well be issues with the scheme not having sufficient assets to fund future liabilities.

Well, yes...saving money to help fund future liabilities. Doesn't bode well for the future does it?

jamesd

It's worth checking the class 3A NI contributions rules for any lump sum offer, just in case it turns out to be a good deal for that reason.

In the case of asavory's mother, she's 86 and receives £190 per month. Pot value is estimated at £15,000. Class 3A would cost £16,047 to buy £190 a month of extra state pension for life, inflation-linked. That cost would drop to £14,863 at 87 or £13,767 at 88. I can't tell how old she will be in October 2015 nor what the trustee offer might be then. This ignores the income tax that would have to be paid on the lump sum used for the purchase, not insignificant.

The trustees may not respond but clearly explaining that they are offering less than it would cost to replace the income can only have positive effects for her, if not them, who may feel some pressure to explain why they are offering less than replacement cost. This is something that may also be mentioning to TPAS.

It is not strictly necessary to merely say no to the trustees. It's possible instead to compare what they are offering with the class 3A option and invite them to make an offer that considers that after tax replacement cost, the life insurance, spousal pension value and any other death benefits, while explaining any differences in inflation-linking treatment that could justify a difference. It could also be worth mentioning that class 3A is declared by the government to be actuarially neutral.

The story in the Times has an 80 year old man receiving a pension of £74.79 gross a month, widow's pension entitlement and £1,200 of life insurance. He was offered a lump sum of £7.651. From October 2015 class 3A national insurance contributions will be available to increase the state pensions of those who reach state pension age before the flat rate comes in. An 80 year old would pay £544 per £1 a week of income. A lump sum of £7,651 could buy an increase of £14.06 a week, £731.12 a year or £60.92. Class 3A is supposed to be actuarially neutral and pays less than offered to this man even without allowing for the insurance. It is inflation-linked and perhaps more strongly than the work pension, which may have caps on inflation-linking.

Offers of lump sums like this aren't inherently bad. For any retiree who has a current life expectancy below that assumed by the scheme actuary it can be a good deal. For those with longer life expectancy, the opposite.

kidmugsy

jamesd wrote: »

It's worth checking the class 3A NI contributions rules for any lump sum offer, just in case it turns out to be a good deal for that reason.

Hats off, jamesd; excellent.

asavory

I promised to post the letters that led up to this, here's some extracts from the first:

Following the changes announced in the budget..., the Trustee has reviewed members' benefits and is pleased to report that you are able to exchange your entire pension for a cash lump sum on the grounds of triviality.

In your case a lump sum calculated and it has been determined that you meet the criteria. Therefore on behalf of the Trustee, a payment in respect of this amount will be paid to your nominated bank account into which we pay your pension.

This letter makes out that a) they are doing you a favour, and b) that it is going to happen. There is nothing in this letter advising how to decline the offer.

asavory

This letter arrived after my mother phoned them and told them she was worried about losing her pension. She got an 11-page form to complete in one letter and then received this one:

I refer to our previous correspondence relating to the exchange of your pension for a trivial commutation lump sum and your request to the Trustees for your pension to continue in payment.

The Trustees have asked us to write to you to request confirmation of the reason(s) why you wish to continue receiving regular of your pension instead of the trivial commutation lump sum which was offered. Once received, the Trustees will consider whether the payment of a trivial commutation lump sum remains appropriate.

kangoora

This seems crazy to me. I thought the intention of trivial pot commutation was to allow the consumer (pensioner or would-be pensioner in this case) the ability to decide how they wished to treat any of these small pension pots and to give them more choice.

NOT, to allow pension companies to enforce trivial pot payments, especially to vulnerable elder people who already have pensions in payment. Looks to me like Mercer are trying to use the rules to absolve their responsibility for future payments and liabilities under the scheme.

It just sounds wrong.

Theoretically, I assume using this set of rules, they can now enforce a trivial payment for all pension pots of <£30k now that the limit has been raised from £18k to £30k?

hugheskevi

Interesting article from Towers Watson on this.

They key paragraph relevant to this post:

It may be possible to make the exchange compulsory, subject to the wording in the scheme rules and legal advice, but forcing a lump sum on members is likely to mean that more generous terms need to be offered.

greenglide

So if they are forcing the trivial commutation lump sum on members how do they know that the members have less than £30,000 across all registered schemes?

woolly_wombat

asavory wrote: »

I feel like I need to share this information. So far I have shared this story with the MSE site and the Pensions Advisory Service, but with no response so far..

Did you ever hear back from the Pensions Advisory Service or from Avon Rubber?

I see that the Mail covered a very similar story on 28 January 2015:
http://www.thisismoney.co.uk/money/pensions/article-2928812/Workers-offered-cash-lump-sum-exchange-benefits-receive-final-salary-pension.html


Money Mail has seen a letter sent to former employees of Wiltshire-based Avon Rubber PLC. An 80-year-old reader who currently receives a pension of £74 a month — but with a spouse’s pension of £764 a year and a £1,200 payout if they died — was offered a £7,651 lump sum in exchange for giving this all up.

The letter says: ' . . . the cash lump sum has been calculated . . . a payment in respect of this amount will be paid to your nominated bank account into which we pay your pension.'

It adds: 'Your pension will then cease and no further benefits will be paid from the scheme.' If former employees are unhappy they can ring a number belonging the scheme.


The reader says: 'The pension is a very useful contribution to our monthly income. The money we’ve been offered could in no way provide the monthly income which we currently receive. We cannot afford to give up the life insurance or the other benefits either.'


The reader appealed and was permitted to stay in the scheme, but:


A spokesman for Avon Rubber says: 'The Avon Rubber plan is authorised to commute small benefit rights worth up to £10,000, so long as various conditions are met.

'There is no requirement for trustees to obtain member consent for small lump sum payments. Whether to commute depends on the member’s personal circumstances and is at the Trustees’ discretion.'


Might be worth contacting the press if you haven't had any joy?


WW