How to complain about poor DB lump sum commutation factor / inequality?

itsmeagain

Hi there. This will probably demonstrate that I don't know what I'm talking about but here goes....!
I'm in a company DB scheme that's offering a transfer of just over £1m, that would permit a tax free lump sum of £250k.
If I keep the DB, they'll only give me £130k lump sum in exchange for 1/4 of my pension (commutation factor of 13 at age 55).
Now.... recently the scheme had a review of how competitive/fair they they were being to its members and significantly improved the early retirement reduction factors. I wondered if there was anyone policing DB schemes that I could complain to, in view of encouraging them to review the commutation factors, or if they free to do whatever they want?

molerat

You don't get "a 1/4 lump sum" from a DB scheme, you get a contractual multiple of the annual pension - generally 3 to 4 times - so you cannot compare the 2 figures.  The £1M takes account of the whole pension.

itsmeagain

molerat said:

You don't get "a 1/4 lump sum" from a DB scheme, you get a contractual multiple of the annual pension - generally 3 to 4 times - so you cannot compare the 2 figures.  The £1M takes account of the whole pension.

How do you explain this then? https://www.jameshambro.com/insight/comment/tax-free-lump-sum/
Checking the maths, my DB pension would actually reduce by 29% to take the lump sum - (worse than 25%) - ouch!

Dazed_and_C0nfused

It is up to each scheme to decide how much they want to bribe you to avoid having the ongoing pension costs.

If you don't like the amount offered just stick with the default pension.

Albermarle

£130K lump sum is a commutation factor of 13 ( normally is around 20)  Which indicates a pension before reduction of £40K .
Considering you are <55 a CETV of only £1million is pretty stingy for giving up a £40K pa pension , presumably inflation linked .
In both cases it looks like taking the pension in full looks the best bet .

hugheskevi

I'm in a company DB scheme that's offering a transfer of just over £1m, that would permit a tax free lump sum of £250k.
If I keep the DB and take their offer of 1/4 pension reduction for a lump sum, they'll only give me £130k (commutation factor of 13 at age 55).

If it was a public sector scheme such as the LGPS, Civil Service, NHS or Teachers' scheme the commutation factor would be lower.

Now.... recently the scheme had a review of how competitive/fair they they were being to its members and significantly improved the early retirement reduction factors. I wondered if there was anyone policing DB schemes that I could complain to, in view of encouraging them to review the commutation factors, or if they free to do whatever they want?

Certainly no-one you can complain to. You could write to the scheme trustees drawing their attention to the scheme profiting from most members who choose to take a lump sum, but they do not have to do anything and probably won't change anything as a result.

With Defined Benefit schemes you tend to find there are enourmous advantages and disadvantages compared to Defined Contribution schemes. You need to take advantage of their strengths and take steps to mitigate their weaknesses, for example:

• Some DB schemes will have a DC section within the scheme, enabling you to build up a tax-free DC AVC
• Some DB schemes allow very competitive purchase of extra pension
• Some DB schemes have very good transfer values (either in or out)
  
• Some DB schemes have very good tax free commutation rates
• Some DB schemes have very good early retirement factors
• Some employers have great redundancy provisions for their DB schemes
  

Assessing well in advance of retirement what the good and bad features of a DB scheme is enables steps to be taken to optimise the scheme, possibly by making DC savings in some form alongside the DB pension.

sheslookinhot

When is the scheme Normal Retirement Age ? The lump sum and annual benefits will be reduced if you have yet to reach NRA.

itsmeagain

sheslookinhot said:

When is the scheme Normal Retirement Age ? The lump sum and annual benefits will be reduced if you have yet to reach NRA.

The NRA is 65 and the figures that I quoted were at 55 (10 years early).

itsmeagain

Albermarle said:

£130K lump sum is a commutation factor of 13 ( normally is around 20)  Which indicates a pension before reduction of £40K .
Considering you are <55 a CETV of only £1million is pretty stingy for giving up a £40K pa pension , presumably inflation linked .
In both cases it looks like taking the pension in full looks the best bet .

The pension is £36,746 at 65 or £27,809 @ 55 (few months time).

NottinghamKnight

The answer is to take the pension when it makes sense for you to do so according to your personal circumstances. Your employment contract states they will pay a set amount per year, you were never promised a lump sum and if the offer they have provided is poor then don't take it. This is all a consequence of the wider financial landscape, transfers out from db schemes (db pensions are of course rare as hens teeth now in the private sector) would rarely have been considered until a few years ago.

dunstonh

If I keep the DB, they'll only give me £130k lump sum in exchange for 1/4 of my pension (commutation factor of 13 at age 55).

There is no 1/4 figure.     The transfer values on DB schemes are far higher than the long term average.  10 years ago, the transfer value, with all other things being equal, would have been around half that figure.     So, you need to forget about the transfer value and how that plays with a hypothetical lump sum.

How do you explain this then? https://www.jameshambro.com/insight/comment/tax-free-lump-sum/
Checking the maths, my DB pension would actually reduce by 29% to take the lump sum - (worse than 25%) - ouch!

The article moans about lump sum inequality and a shocking disparity but it conveniently ignores the lower income that DC pensions will typically without taking higher risks on their drawdown.  Or the fact that the cost to you to obtain that pension was almost certainly a fraction of what DC pension holders have to pay.  Indeed, some DB schemes cost nothing for the pension holder (non-contributory).