Early retirement factors from my DB scheme

segovia1

My employer is proposing to close its DB scheme to accrual.  The info we've been given says that retiring early as a deferred member will mean that my pension is reduced by more than it would be if the scheme had stayed open to accrual and I'd taken my early retirement pension as an active members.  Does anyone know why the factors to reduce the pension are different for active and deferred members?

AlanP_2

At a guess because there will be less money going in to the scheme once it stops. Current empoloyees contributions pay existing pensions to a certain extent. 

Thrugelmir

If you remained an active member then you would continue to accrue further benefits and continued to contribute to the scheme.  
With the scheme in deficit. Those that jump ship now will have their benefits adjusted accordingly. 

Marcon

segovia1 said:

My employer is proposing to close its DB scheme to accrual.  The info we've been given says that retiring early as a deferred member will mean that my pension is reduced by more than it would be if the scheme had stayed open to accrual and I'd taken my early retirement pension as an active members.  Does anyone know why the factors to reduce the pension are different for active and deferred members?

Three reasons. One is that employers can if they wish encourage certain employees to retire early, often as part of a redundancy package, by offering 'better' retirement terms to active members. Employer consent is almost invariably required, because such early retirements cost money - and it is the employer who is ultimately on the hook to ensure that the scheme has sufficient assets to pay the promised benefits.

The second is rather more technical. When the scheme is formally valued (known as a triennial actuarial valuation, because as the name suggests it happens every 3 years), valuations allow for active members to have all their benefits linked to assumed future salary increases, whereas deferred members whose benefits revalue in deferment have increases linked to prices. Historically wage inflation is higher than price inflation, so active members who retire early still have a bit of an extra 'cash cushion' (for want of a better phrase) held in the scheme to cover their benefits, which helps to allay the cost of their early retirement. That 'cash cushion' comes out in the wash at the next triennial valuation if by then they are deferred members.

The third reason, which is less common, is that the scheme rules stipulate that early retirement from active service is at a given % and early retirement from deferred status is at a higher given %.

Brynsam

Thrugelmir said:

If you remained an active member then you would continue to accrue further benefits and continued to contribute to the scheme.  
With the scheme in deficit. Those that jump ship now will have their benefits adjusted accordingly. 

Nothing to say the scheme is in deficit - and that's not the answer to OP's question even if it is. Read Marcon's answer to understand the true reasons.

Nor would a scheme being in deficit mean that benefits are 'adjusted accordingly'. Scheme rules would prevail in terms of pensions being paid. Transfer values would be paid normally unless the scheme is so severely underfunded that a temporary reduction in CETVs is agreed after following the correct procedures.