Enhanced Contribution to DC Scheme - Any Advice Please

BennyBrownBoy

Hi,

I've posted previously about my company being acquired by another and the likelihood of my DB scheme coming to an end.

This was confirmed to me in writing on Friday. I've been lucky enough to be in a DB scheme for approximately 26 years. The accrual rate in my current scheme is 1.75% of pensionable earnings. My contribution is 9% of salary monthly. The scheme allows for CPI indexation and 50% spouse pension on death. I will keep all benefits accrued so far but on January 1st 2015 will enter a DC scheme in the new company.

As part of the company acquisition, the acquiring company have confirmed that they will maintain the value of the DB scheme for a minimum period of 2 years post-transfer, by way of an enhanced employer contribution to my new DC scheme. The enhanced contribution offered is 23% of salary from the employer.

From the conversations I've had with colleagues, I'm advised this is generous - the figure has apparently been calculated by external actuaries using "assumptions about the future".

From what I can see this is a "take it or leave it" situation. I've asked for the assumptions used in the calculation but have not received them yet.

What do the experts on here think?

Is this generous or not?

What sort of things would you expect to see in the assumptions used by the actuaries to arrive at the 23% enhanced contribution offer?

(I accept the acquiring company will be unlikely to continue this beyond 2 years, so obviously there is a loss of value to me beyond that point).

Many thanks for your advice.

mgdavid

Very generous; it's pretty common to be moved from a DB to a DC scheme with no sweetener or carrot at all, whether with the same employer or as a result of takeover.

kidmugsy

BennyBrownBoy wrote: »

As part of the company acquisition, the acquiring company have confirmed that they will maintain the value of the DB scheme for a minimum period of 2 years post-transfer, by way of an enhanced employer contribution to my new DC scheme. The enhanced contribution offered is 23% of salary from the employer.

From what I can see this is a "take it or leave it" situation.

I'd say it was more of a "Could anyone be so foolish as not to take it?" situation. And you will have two years in which to plan your change of employer if you think that the eventual DC terms will not be to your taste.

BennyBrownBoy

kidmugsy wrote: »

I'd say it was more of a "Could anyone be so foolish as not to take it?" situation. And you will have two years in which to plan your change of employer if you think that the eventual DC terms will not be to your taste.

Thanks kidmugsy - I think you are right but am keen to understand the assumptions they might have made to arrive at the enhanced figure. I'll await the company response, but are you able to give a view on what I should expect to see?

hyubh

BennyBrownBoy wrote: »

The enhanced contribution offered is 23% of salary from the employer.

I leave discussing the DC side to people who know about that sort of thing, but as a 'finger in the air' figure an employer rate of 23% relative to 26 years FS membership and an employee rate of 9% sounds comparable to the sorts of employer rates contractors pay in the LGPS - when a local authority outsources, TUPE'd employees maintain pension rights and their new employer enters the LGPS fund with a custom employer rate determined by the pension fund's actuary relative to the risk to the fund of both the transferred employees and their new employer (e.g.: lots of membership with a final salary still to be determined = risky; new company with unproven long-term solency = risky). In fact, and notwithstanding how it is time limited, 23% sounds if anything at the higher end, given it doesn't need to take account of the employer potentially defaulting.

atush

Personally I feel the amt given to you is if not generous, reasonable.

I feel 25% is closer, but you are putting in 9% tax free yourself so this brings it up.

I'd also like to know what might happen in 2 years time, how low will their contribs drop for those of you in the old company? and the more important compulsory or voluntary redundancy arrangements going forwards?

sandsy

The assumptions will be based on the cost of providing the current benefits less the employee contribution, ie. they're saying that it currently costs 23%+9% =32% to provide the existing DB benefits which seems about right, and is certainly consistent with previous comments made on this board. It shows the value of DB schemes.


In coming to that figure, they'll have made assumptions primarily about the asset returns that could be achieved both pre- and post-retirement, taking into account the need to provide CPI-linked increases, and the longevity of the scheme members, as well as the costs of running the scheme.


It's a generous offer given that typical employer contributions to DC schemes are in the order of 6%.

BennyBrownBoy

Thanks everyone - as ever I appreciate your advice.

atush: is there any reason for suggesting 25%?

After 2 years, I guess it's anyones guess if they will leave it at 23% or reduce it down to their "normal" contribution. No one seems to be willing to give any assurances beyond two years - not especially surprised by this...

In terms of redundancy during the 2 year period - we have had it confirmed that this will be at the rates of the current employer (typically generous in previous redundancy rounds). After that it will presumably be at the new employer rates - unknown at this stage but likely closer to statutory.

Just need to hang on in there for a few more years...