Defined Benefits Scheme - felling a little nervous...

cloud_dog

Hi

I am in a DB scheme at work. As with many DB schemes going back over the years companies have tried to mitigate / reduce liabilities etc, etc.

My company is no different. They closed the DB scheme to new employees years ago, employee contributions have been increased, the effect of any pay rise is limited to 1% in the DB scheme (like we've had pay rises).

Basic info....Age 52, retirement date 2030, SP 2032.

The point of this post is that I've just received the latest Trustees Report and I'm wondering if the report is telling me something without actually telling me anything, i.e. they are preparing to close the scheme all together and do whatever it is companies do with these DB schemes.

Things which raise my concern are the below from the report:

..................................31 Oct 2013....31 Mar 2014....31 Mar 2015....31 Mar 2016
...........................................(£M)..............(£M)..............(£M)................(£M)
Market Value Assets.............82.5................82.7..............92.5.................90.9
Technical Provisions..............95.5...............96.2.............115.3...............118.1
Deficit..................................13.0..............13.5................22.8................27.2
Funding Level.......................86%...............86%..............80%.................77%

The report then goes on to say:

"If the Company were to cease sponsoring the Scheme and the Trustee secured benefits with an insurance company, then the premium for doing so would be high. At 31 October 2013, it was estimated that an insurer would require a premium of around £153m meaning that the assets would secure around 54% of the benefits. If the Company were unable to meet the extra amounts required by the insurer, then your benefits may not be met in full and may become payable by the Pension Protection Fund.
(for more information, visit the PPF website at https://www.pensionprotectionfund.org.uk)

It is important to note that there is no suggestion that the sponsoring employer may cease to sponsor the Scheme.

Furthermore, a significant debt is likely to be due from the sponsoring employer in such circumstances and the security package described above may be called upon.

We are required to inform you, as part of this statement, that there have been no payments of surplus made to the Company and that the Pensions Regulator has not intervened with the running of the Scheme."

So my nervousness revolves around the deteriorating liabilities (increasing deficit) of the scheme and the last para.

Some additional background, my company is owned by venture capitalists and the owners and previous owners agreed to make additional payments to reduce the deficit. Other than the highlighted paragraph above I'm not aware of previous 'additional' payments not having been made.

The scheme has:

• 70 Active Members
• 255 Pensioners
• 598 Deferred
• 923 Total

I believe that where DB schemes are (do not know the correct terminology) but, 'wound up' that existing pensioners (those claiming pensions) benefits are protected first and someone like me (still paying in) is bottom of the priority list and would be left with whatever is remaining.

As you may have picked up I know very little about the intricacies of pensions.

What is it I am asking?

1. Thoughts from professionals or others who have experience of this situation (or can read the tea-leaves and see where this may be heading)
2. Might I be financially wiser to request a transfer of my pension to a Personal Pension / SIPP (appreciate I could lose value but IF the scheme were to go downhill it appears I may only receive 50% of my pension as it stands; and that was based on 2013 position).
3. Am I being paranoid

dunstonh

So my nervousness revolves around the deteriorating liabilities (increasing deficit) of the scheme and the last para.

Over the last decade, the assumptions used in calculating the liabilities of the pensions has changed. They have largely moved from a position of higher than realistic assumptions to lower than realistic assumptions. So, even if you had a strong fund that has seen growth above assumptions and more than liabilities, it would show increased liabilities

One if the major influences is that they use gilt yields in those assumptions and they have never been lower.

You can see how the value of the assets has risen nicely over those years and the 2016 level is not far off the 2013 level requirements. This is a closed scheme. So, its not as if new members have pushed liabilities higher. The technical provisions have gone up as the figures in the assumptions have changed.

Whilst some firms do have major liability issues on their pensions, the situation is not as bad with many companies as it first appears.

cloud_dog

Yes, the report does talk in terms of gilt yields historical and going forward.

I think I'll put my paranoia back in it's box for a little longer :beer:

ischofie1

The closing of a DB scheme to new members if often the 1st phase of closing it all together.

Often people wrongly believe that closing to new members is done to protect the scheme for existing members.

mgdavid

The way I read it you've possibly misunderstood the highlighted para.

'surplus payments TO the Company' refers to pension fund surpluses being passed back to the Company (employer) as was quite common in previous decades. Not doing it is good.
Then, 'the Pensions Regulator has not intevened...' is also good as it means there's no funny business going on.
Maybe a pro would confirm my understanding?

cloud_dog

Yes, well spotted.

Having re-read it, it does appear, as you say, to refer to surplus payments being made to the company (from the scheme).

More mind being rested. Thanks for your comment.

sandsy

5 in every 6 DB schemes are in deficit and the deficits have grown due to economic circumstances. It's highly unlikely that 5 in every 6 DB schemes will be up in the PPF.

cloud_dog

Yes, I appreciate that but, there is also the 'background' situation regarding the company. Obviously I don't get to look at the books but it feels like we are being squeezed (ridiculously, i.e. blood, stone).

So, I may well have put 2 and 2 together and got a bunch of bananas but that's life.

Malthusian

cloud_dog wrote: »

Might I be financially wiser to request a transfer of my pension to a Personal Pension / SIPP (appreciate I could lose value but IF the scheme were to go downhill it appears I may only receive 50% of my pension as it stands; and that was based on 2013 position)

If the employer went bankrupt and the scheme was unable to buy out its liabilities, you won't get 50% of your pension, you will get 90% under the Pension Protection Fund unless your pension entitlement was more than about £37k a year. (There is also a cap on inflation-linking.)

The general assumption is that growth in a private pension fund will not match the benefits under a DB scheme, even if it goes into the PPF and takes a 10% haircut. There are exceptions (and inflated transfer values due to low gilt yields make exceptions less unlikely) but in general the accepted wisdom is that you should not transfer out of a DB scheme unless proven otherwise.

I believe that where DB schemes are (do not know the correct terminology) but, 'wound up' that existing pensioners (those claiming pensions) benefits are protected first and someone like me (still paying in) is bottom of the priority list and would be left with whatever is remaining.

Not the case. If a DB pension scheme is wound up and the liabilities transferred to, say, an insurance company, the insurance company must guarantee everyone's existing benefits 100% (though it would be closed to further accrual).

If the sponsoring employer cannot pay its obligations to the scheme and goes bankrupt, and the scheme does not have the money to buy out its liabilities and no other solution can be found, then as mentioned it would go into the PPF. Existing pensioners are treated more preferentially than those still paying in - provided they didn't take early retirement (they don't suffer the 10% haircut or cap on total pension, though they do get the cap on inflation increases). However those still paying in get considerably more than "whatever's left". Don't confuse the rules on DB pensions with the rules on creditors in insolvency.

LXdaddy

I would suggest putting your paranoia on hold. The information you have posted is not a real cause for concern.

As others have pointed out - the apparent increase in underfunding is caused by the technical provisions rising more quickly - as a result of changes in the assumptions that need to be made and on gilt returns being very low currently. so you are comparing apples to oranges when you compare the different years.

Also the highlighted paragraph is GOOD news not BAD news. The Pension fund has not been giving money into the employer and the pension regulator has not needed to step in.

cloud_dog

Thanks again everyone, I now have a slightly expanded understanding on certain pension aspects.