Pension increase in exchange for foregoing future inflation - advice

Thrugelmir

saver861 wrote: »

Its a gamble for them also - if the client dies within the 12 year break even time then they have lost.

Provider has a totally different perspective. Solvency requirements etc. So won't be gambling. In fact totally the reverse as crystallises the potential liabilities of the fund.

saver861

Thrugelmir wrote: »

Provider has a totally different perspective. Solvency requirements etc. So won't be gambling. In fact totally the reverse as crystallises the potential liabilities of the fund.

Gamble might not be the correct term to apply to it but, it is not without risk to the provider, depending on time of death. Clearly early death would mean the provider has paid out more on the flat rate system.

The flat rate crystallises the liabilities only to the extent of not having to consider inflation. The length of payment will always remain variable, regardless of which option is chosen. So while the flat rate model will be to some degree more predictive, I don't go with you that it is the total reverse.

Malthusian

The question I would ask is why. No business does anything (financial) without good reason.

The insurer is offering it because they expect to pay out less over the course of the annuity. This is hardly a secret or a conspiracy against OP's dad. It does not necessarily mean OP's dad gets screwed over, because he will place a different value on money now than the insurer does.

It is a fair point that his wife should be considered, as she would usually expect to live a good number of years beyond him. (Longer life expectancy + probably younger than him.) But it's possible her widowed years may be adequately provided for already.

That's human nature. Short term view and thinking. Jam today.

I think you need a better literary allusion. The whole point of the "jam tomorrow" story in Alice In Wonderland is that jam tomorrow is potentially worthless.

Humans can be poor at fully valuing the future, but it does not change the fact that jam now is objectively better than the same amount of jam in the future.

kidmugsy

The pension scheme's offer will always look mean because they have to protect themselves from "moral hazard" i.e. the risk that couples with the prospect of short lives will take the bigger pension while couples with the prospect of long lives will keep the inflation protection.

Thrugelmir

Malthusian wrote: »

I think you need a better literary allusion. The whole point of the "jam tomorrow" story in Alice In Wonderland is that jam tomorrow is potentially worthless.

Not my reference point. Plenty of studies undertaken that demonstrate the propensity of people to accept something today. That appears attractive to them. Rather than waiting a longer period and receiving a far larger sum.

Thrugelmir

Malthusian wrote: »

The insurer is offering it because they expect to pay out less over the course of the annuity.

That's a micro view. Rather than considering the full implications of the Solvency II regulations at a macro level. This will simply be one of many levers being pulled.

FLAPJACK

Would this be the BBC Pension Scheme by any chance?


I know BT have offered the same to their pensioners too....this may become a new trend in DB pensions.


Its good timing offering this option when inflation +/- 0%. It looks a no brainer in that light.....but maybe if the OPs dad works out the annual inflation rate for each year he has been a pensioner that will show him how much his pension has increased over the number of years.


Compare that with the increase being offered....and bear in mind that it has been said that the economy need inflation to be at least 2%. Would refusing the offer prove beneficial in the long run?


Who knows...as someone has already said if we knew how long we had left things would be so much easier!


It's absolutely down to the individual circumstance that's for sure....another thing that's for sure the provider ain't offering it out of the goodness of their heart.


As a pensioner he will be hoping to draw the increased pension for years to come As a provider they will be hoping the opposite....and in the meantime if the offer is accepted they will know with certainty what the schemes outgoings are for the foreseeable, and in the economic climate that's for protection of the scheme in the long run.

Rodders53

My FS pension scheme is offering me a PIE...

They are also paying for independent financial advice for me to talk through the options for me and swmbo (as she get 2/3 of mine should I die first). {Does the OP's father's provider offer this?? It's supposed to be best practice to do so.}

In my case only around half my pension in payment value qualifies to be exchanged for giving up RPI increases, so a good proportion will remain inflation proofed (along with state pension when that kicks in for me).

I'm 62 and looking at the 'bird in the hand' of a 20% uplift (less 20% tax) now vs the loss of inflation proofing at an older age {and having to spend savings to make up for it}. Now if only someone could provide me the RPI figures for the next 15 years I'd be certain what to do.

My scheme is transparent in that they state they expect to pay out only 75% overall compared to the 'status quo' if everyone offered takes up their PIE. Again this number should be given in the information to the OPs father and allows one to gauge the level of savings to the scheme in question.

woolly_wombat

Rodders53 wrote: »

My scheme is transparent in that they state they expect to pay out only 75% overall compared to the 'status quo' if everyone offered takes up their PIE.

Surely that tells you all you need to know!

hugheskevi

Worth recalling some RPI figures from the past (which are shamelessly cherry-picked to be the highest period in recent times):

1981 - 12.0%
1980 - 15.1%
1979 - 17.2%
1978 - 8.4%
1977 - 12.1%
1976 - 15.1%
1975 - 24.9%
1974 - 19.1%
1973 - 10.6%

£1 in 1972 was worth 29p in 1981. If pension scheme increases are uncapped (many are capped at 2.5% or 5% or even discretional, depending on when accrued), they are a very good hedge against inflation of these levels.

A man aged 60 now with a pension and in good health can expect to live almost 30 more years (and many will live longer). A lot can happen in that time (30 years ago it was 1986...personal pensions as we know them today didn't even exist). Guaranteed protection against inflation is a very valuable asset, and foregoing it, especially at less than expected value, is something to consider very carefully.