miscalculated pension

minimoney1

In June I reached the designated retirement age (62) from a final salary scheme attached to a company I stopped work for about fifteen years ago.
Their first letter to me offered me a full pension of £16,955.72 p.a. OR a PCLS commuted from my benefits of £78,559.50 with a pension of £11,783.92 per annum.
I had the option to receive a self-elected PCLS and therefore requested the figures for a PCLS commuted from my benefits of £30,000 p.a..
They replied this would be a lump sum of £30,000 and a reduced pension of £14,980.74 per annum, or £1,240.90 per month (gross).
I accepted this statement and signed and returned the paperwork as requested, and the Pension Fund has since paid me three instalments at this monthly figure.
Today I received a letter from the Pension Fund telling me that: 'following a recent review an error was discovered in the calculation of your benefits at the date of retirement. The current pension in payment amounts to £14,980.74 gross.....however the annual pension due after taking a £30,000 pension commencement lump sum should be £13,216.46 per annum" .
This represents a reduction of £1,764.28 a year - a not inconsiderable sum.
The Pension Fund is giving me three notice of the reduction until January 2016 and are writing off the overpayment until then (six months). All well and good, but their 'miscalculation' makes a considerable difference to my planned retirement income .
It seems incredible the Fund can make an error of this size and reduce my yearly pension payment by this amount more than three months after the benefits were agreed and payments began.
Do I have any redress or must I accept this?

jamesd

Full pension £16,955.72 commuted to £11,783.92, reduction of £5,171.80 for a lump sum of £78,559.50 is a commutation rate of 15.19:1.

Full pension of £16,955.72 commuted to £14,980.74, a reduction of £1,974.98, for a lump sum of £30,000 us a commutation rate of 15.19:1.

The commutation rate for the original default lump sum and the £30,000 lump sum are about the same. This passes the sniff test, the numbers are internally consistent and within the sort of range of commutation rate that could be expected.

The review suggests that a full pension of £16,944.72 to £13,216.46, a reduction of £3,728.26, for a lump sum of £30,000 is a commutation rate of 8.05:1. That commutation rate is far below what would normally be expected.

The first numbers you received had effectively the same commutation rate. The new one has a commutation rate that is only a little over half the original commutation rate.

With many schemes there are two commutation rates that can be used:

1. the normal forward commutation rate that trades income for a lump sum
2. a reverse commutation rate for buying more income with the lump sum.

Type 2 might be used where a scheme just assumes that everyone wants the default lump sum then prices reductions as buying more income.

It's possible that whoever did the original calculations didn't check or notice that instead of trying to increase the lump sum you were trying to reduce it and used the forward commutation rate when the scheme rules said that a reverse commutation rate should be used.

The commutation rate in the reviews is so grossly bad that if they insist it is correct, I suggest that you tell them that you want to go to the original combination of [STRIKE]£16,955.72 and lump sum of £78,559.50[/STRIKE] £16,955.72 with no lump sum because that looks like a better deal for income and ability to use that or state pension saving to get a lump sum than their lump sum deal at the 8% rate.

I suggest that you copy them this post and ask them to explain the apparent gross discrepancy in commutation rates used and how they arrived at it.

You should have no difficulty at all getting a higher income than the review number by spending some of the higher lump sum on it. The lump sum difference is £78,559.50 - £30,000 = £48,559.50. The income difference is £13,216.46 - £11,783.92 = £1,432.54. 1432.54 / 48559.50 * 100 = 2.95% yield. You can get 5.8% yield inflation-linked for life by waiting until state pension age then deferring claiming your state pension. That rate is reduced a bit by the need to spend £1,432.54 from the capital a year before you get to state pension age to maintain the same income level but it's still going to be a good deal better than their revised offer. I'm assuming that you're eligible to defer and ignoring the possibility that the work pension would provide significant spousal or death benefits that deferring the state pension doesn't provide.

If they do explain it as a reverse commutation issue tell them that you want them to put you in your original position with the original quote and take them to the Pensions Ombudsman if they decline. It's their mistake and putting you back into your original position at least is what they should be trying to do. You can expect to have to repay the extra income you've received above the original income quote, just do that out of the higher lump sum.

GunJack

jamesd wrote: »

I suggest that you tell them that you want to go to the original combination of £16,955.72 and lump sum of £78,559.50..

think you may have mis-read the op, it was pension of £16-odd k OR ls of £78k with pension of £11k-odd, NOT £16k p + £78k ls

dunstonh

It seems incredible the Fund can make an error of this size and reduce my yearly pension payment by this amount more than three months after the benefits were agreed and payments began.
Do I have any redress or must I accept this?

I had one like this in the past. The person retired early and moved out of London only to find that later that they didnt have as much pension as they had been told. It went to the ombudsman who ruled that an error did not give entitlement to the money.

The error hasnt changed anything. had they quoted the correct amount in June then you would have been none the wiser. So, whilst you are going to be disappointed, this is not money lost and it hasnt impacted on your decision to retire as you stopped work 15 years ago.

The Pension Fund is giving me three notice of the reduction until January 2016 and are writing off the overpayment until then (six months).

That is quite a generous compensation for these things. More frequently when errors happen, you see requests for repayment of the extra amount. That is effectively your redress.

xylophone

think you may have mis-read the op, it was pension of £16-odd k OR ls of £78k with pension of £11k-odd, NOT £16k p + £78k ls

of £16,955.72 and lump sum of £78,559.50.

He missed out "commuted to £11,783.92" before "and" when typing the post?

The OP had a deferred DB pension - after so gross an error, my inclination would be to write to the administrator and ask him to explain how the deferred pension was calculated, and the factors used by the scheme for commutation and inverse commutation if different.

I think that since in the "offer letter", the factor used in both cases was the same, (and assuming that information originally provided to the OP in his copy of the scheme rules did not contradict), it is perfectly understandable that he would expect that the figures he was given were correct.

Under these circumstances, ( and particularly as the commencement of the pension is of such recent date) the OP should expect to be able to make his choice again, with the correct figures and not to be penalised by the administrator's error?

dunstonh

Under these circumstances, ( and particularly as the commencement of the pension is of such recent date) the OP should expect to be able to make his choice again, with the correct figures and not to be penalised by the administrator's error?

I would think that would be considered fair and reasonable.

minimoney1

Thank you so much for all your comments and help, and especially to jamesd's very detailed reply. I have learned a lot!
I have now written a letter to the Fund asking them to explain the discrepancy in commutation rates and how they arrived at this new figure, and asking for a copy of the actuarial commutation factors relating to the scheme (I can only ask).
I do not want to prejudge their reply but I suppose it is possible they will say they made an error throughout in proposing a rate of 15.19:1. In that case I will have to put up with it. However if the rate for the £78,000 really was 15.19:1 and this new rate only applies to my lower 30,000 PCLS figure then I will consider asking for the original PCLS of 78,000 instead of the 30,000 I took, and investing the 48,000 difference for a higher yield.
I agree that their decision to give me 3 months notice of the change and not ask for anything back is a sign of good intent on their part so if I do go down this road I hope they will be reasonable.
I am not yet retired (state retirement age for me (female) = 63 and a half; current job retirement age at my discretion) and I do plan to defer my state pension while I am still working.
I am so grateful to you all for your help and advice.

jem16

minimoney1 wrote: »

I have now written a letter to the Fund asking them to explain the discrepancy in commutation rates and how they arrived at this new figure, and asking for a copy of the actuarial commutation factors relating to the scheme (I can only ask).

Which scheme is this? Do you have a copy of its rules?

I am wondering if there is an automatic lump sum involved or not? Usually if an automatic lump sum is involved you would be given the annual pension figure plus the lump sum figure and then asked to say whether you want an increased lump sum.

However your first letter offered a full pension which suggests there is no automatic lump sum.

xylophone

Re new state pension

https://www.gov.uk/new-state-pension/overview

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447195/new-state-pension--effect-of-being-contracted-out.pdf

Have you requested a statement to help with planning?

https://www.gov.uk/state-pension-statement

I hope you will let us know how you get on with the deferred pension error.

minimoney1

No, there was no automatic lump sum. I could have taken full pension instead of a PCLS and pension.
Thanks for the state pension links. I did already get a statement to help with planning on this. As have so many others, I found that despite my expectations, because a number of my pension years were contracted out I am well short of the full state pension despite so many years of working. But I still hopefully have at least a few years to go earning for this, so we shall see.
I will keep this thread posted with the outcome of my discussions with this Pension Fund.

PensionTech

OP, do you know whether the £16,955 figure was correct in the first place?

It seems much more likely to me that they got your full pension wrong (and therefore the reduced pension also wrong) than the commutation factor. It's also not going to be the case that the higher commutation factor applies if you commute more of your pension, as that's not how these calculations work - I wouldn't bother pursuing that, as it will only make this more drawn-out, confusing and ultimately disappointing than it needs to be.

It's not pleasant but the basic legal position is that you're only entitled to whatever you actually accrued in the scheme - which means that if they messed up a calculation and told you that your pension was higher than it actually was, you don't have a right to the overstated amount.

I've gone into some detail about this kind of thing in a previous thread: http://forums.moneysavingexpert.com/showpost.php?p=68493677&postcount=2