A different 'taking a lump sum from a DB pension' question

Stay_Or_Go

TVAS said:

STAY where you are the CETV of a factor of 25 times the gross pension at 60 represents poor value.

If you are saying the commutation factor is 12:1 i.e.£12 cash for every £1 pension given up it is poor value to commute to cash. A good commutation factor is 20:1 and over. 

I agree that the rates are not good value for pensions with good inflation proofing - unfortunately my pension has poor inflation proofing (the best I can hope for is a max of 3% on 50% of the full pension), Also the lump sum commutation increases to approx 15 times when you consider that the pension will be taxed.

TVAS said:

You have not said how long you have to 60 nor have you said if the company are making additional contributions to address the scheme deficit. The performance of the company is key as they are the sponsoring employer of the pension scheme. So if they are doing badly then the scheme may go to PPF. If the company are doing well and they have profits they can pay an additional contribution over a certain period or transfer their liability to an insurance company or other provider by sending them a big phat cheque. This is cold a Bulk Buy out.

I'm male but the scheme allows me to retire at 60 (I'm 59 now) on full benefits. The company is attempting to address the scheme deficit and as of 2019 the solvency estimate was 84% (i.e. if they had to pay an insurance company then the scheme only covered 84% of what would be needed), but who knows how those finances have performed since or in the post-covid future - I'm hopeful that it won't ever go into the PPF, if I wasn't then I'd be paying a lot more attention to the CETV option.

jamesd said:

For spousal protection, why not take the higher pension and use that to fund life assurance?

For low CETVs with no flexibility or health needs, comparing how much state pension deferral could be paid for is worth doing. You can decide the spousal split by having one person defer more than the other. State pension deferral for the first year costs about the same as 17.2 CETV multiple and gradually gets less good over time, but no spousal benefit. Uncapped inflation increases using CPI.

That's a good thought about life assurance which I hadn't thought of. I've had a look and it could be a good move as it's nowhere near as expensive as I thought it might be for a 20 year policy. Doing it that way would also solve the issue that if the scheme does ever go into the PPF whilst I'm alive then my OH would only receive 50% of the reduced pension at the time of my death (as opposed to 60% of my full pension if it wasn't in the PPF)

With regards to the state pension we're planning to defer for my OH for at least a couple of years. If I did take the CETV then we'd definitely do it for us both and would need to really work out the figures for the best cost/benefit.

Marcon said:
The 'competitive' bit would be the cost of buying out in the first place.The massive cost of buying out benefits makes it unlikely in the extreme that the trustees would be handing over any more cash than would be strictly necessary - it is likely that the employer would already have had to fork out a hefty top up just to get to buy out level (with the resultant dent to the employer's financial statements).

I 'd go even further than that and say that there is more chance of somewhere rather hot freezing over than that happening.

Albermarle

The company is attempting to address the scheme deficit and as of 2019 the solvency estimate was 84% (i.e. if they had to pay an insurance company then the scheme only covered 84% of what would be needed), 

AFAIK a lot of private sector DB schemes are in deficit, and I do not think 84% is that bad ?

The main factor is whether the employer will keep going and contribute to slowly closing the gap .

TVAS

Agree with Albermarle 84% is not bad which is why I asked the question and the employer is trying to breach the gap. The point is that an insurance company has more scope for investment than a DB pension scheme. So depending on the investment climate they can do a lot with a Bulk Buy Out Premium which may not be as expensive as the employer thinks. 

I have never understood why large DB schemes did not venture more into direct investments such as building social housing from scratch to get a yield of 5%.   

Marcon

TVAS said:

So depending on the investment climate they can do a lot with a Bulk Buy Out Premium which may not be as expensive as the employer thinks. 

Don't forget the impact on the sponsoring employer's financial statements if the scheme moves to buy out. If the scheme is in surplus (remember that expression?!), it hits the balance sheet as well as the P&L; if it is in deficit, the impact on the P&L will always be at least as expensive as the employer thinks....and usually far worse than they'd hoped.

TVAS said:

I have never understood why large DB schemes did not venture more into direct investments such as building social housing from scratch to get a yield of 5%.   

Some large DB schemes do - particularly funded public sector schemes.