Calculation method changed on db pension for early retirement

Pat38493

xylophone said:

Before you register a complaint, obtain a copy of the scheme rules and (if relevant) any amendments.

I guess this is correct because I suppose it could be that there is something else in the rules that mean that the countback is only applied in specific rare cases - like active contributing member who has fully funded their scheme to 40 years, but nevertheless retires before NRA - however that couldn’t even happen here because the scheme was frozen years ago.

If this is not the case, and the prior custom and practice and implication of the rules is to follow the revalaue to NRA then countback approach, I’m not sure how the scheme trustees can just suddenly decide not to do that anymore.  Could be useful to have statements from prior retirees who stated that they definitely received their actual pension under the calculation method from the first mentioned estimate.

DT2001

toolateforsums said:

From the original scheme administrators when I asked for a quotation

'The estimated pension at 65 is £35,327.69 pa. At 55 you would get 60% of this, ie £21,196.61 pa. '

It is very clear above how the rules are applied . I was 53 at the time . The 4% pa reduction has not changed since my enquiry.

Changing scheme administrators should not allow for this change to happen surely?Not without changing the scheme rules?

My origiinal post mentioned about the fact i had reduce my contribution level for around 2 years and taken redundancy without looking for alternative positions with the company which i could have done. Hence my original questions.

I’ve just reread part of this thread and cannot see how the bold statement above could be correct.
The scheme has closed so there are no benefits accruing and so the only change to the value of the pension would be any inflationary increases in deferment. 

WTW actuaries for Barclays wouldn’t even estimate the GMP element of my pension when it is due to increase by a fixed rate until 65 on the basis that rules could change.
My pension was taken early on the basis of - value at deferment date plus annual increases to early retirement date less actuarial reduction (just under 40% for 9+ years).

If you add in future estimated increases you cannot then increase in deferment.

Pat38493

DT2001 said:

toolateforsums said:

From the original scheme administrators when I asked for a quotation

'The estimated pension at 65 is £35,327.69 pa. At 55 you would get 60% of this, ie £21,196.61 pa. '

It is very clear above how the rules are applied . I was 53 at the time . The 4% pa reduction has not changed since my enquiry.

Changing scheme administrators should not allow for this change to happen surely?Not without changing the scheme rules?

My origiinal post mentioned about the fact i had reduce my contribution level for around 2 years and taken redundancy without looking for alternative positions with the company which i could have done. Hence my original questions.

I’ve just reread part of this thread and cannot see how the bold statement above could be correct.
The scheme has closed so there are no benefits accruing and so the only change to the value of the pension would be any inflationary increases in deferment. 

WTW actuaries for Barclays wouldn’t even estimate the GMP element of my pension when it is due to increase by a fixed rate until 65 on the basis that rules could change.
My pension was taken early on the basis of - value at deferment date plus annual increases to early retirement date less actuarial reduction (just under 40% for 9+ years).

If you add in future estimated increases you cannot then increase in deferment.

Maybe my brain has gone haywire but to me this cannot be right. You cannot revalue the deferred pension amount only to the early retirement date, and then further apply the rule about reduction from NRA.  This is negative double counting because it was never calculated forward to the NRA

najan49

Pat38493 said:

DT2001 said:

toolateforsums said:

From the original scheme administrators when I asked for a quotation

'The estimated pension at 65 is £35,327.69 pa. At 55 you would get 60% of this, ie £21,196.61 pa. '

It is very clear above how the rules are applied . I was 53 at the time . The 4% pa reduction has not changed since my enquiry.

Changing scheme administrators should not allow for this change to happen surely?Not without changing the scheme rules?

My origiinal post mentioned about the fact i had reduce my contribution level for around 2 years and taken redundancy without looking for alternative positions with the company which i could have done. Hence my original questions.

I’ve just reread part of this thread and cannot see how the bold statement above could be correct.
The scheme has closed so there are no benefits accruing and so the only change to the value of the pension would be any inflationary increases in deferment. 

WTW actuaries for Barclays wouldn’t even estimate the GMP element of my pension when it is due to increase by a fixed rate until 65 on the basis that rules could change.
My pension was taken early on the basis of - value at deferment date plus annual increases to early retirement date less actuarial reduction (just under 40% for 9+ years).

If you add in future estimated increases you cannot then increase in deferment.

Maybe my brain has gone haywire but to me this cannot be right. You cannot revalue the deferred pension amount only to the early retirement date, and then further apply the rule about reduction from NRA.  This is negative double counting because it was never calculated forward to the NRA

As far as I know this is totally normal.

The revaluation is accounting for inflation. There may be different revaluation rates before and after drawing the pension, but the aim is to leave you more-or-less in the same position in real terms.

If there was no early retirement factor applied the scheme’s NRD might as well be 55.

Shimrod

Pat38493 said:

DT2001 said:

toolateforsums said:

From the original scheme administrators when I asked for a quotation

'The estimated pension at 65 is £35,327.69 pa. At 55 you would get 60% of this, ie £21,196.61 pa. '

It is very clear above how the rules are applied . I was 53 at the time . The 4% pa reduction has not changed since my enquiry.

Changing scheme administrators should not allow for this change to happen surely?Not without changing the scheme rules?

My origiinal post mentioned about the fact i had reduce my contribution level for around 2 years and taken redundancy without looking for alternative positions with the company which i could have done. Hence my original questions.

I’ve just reread part of this thread and cannot see how the bold statement above could be correct.
The scheme has closed so there are no benefits accruing and so the only change to the value of the pension would be any inflationary increases in deferment. 

WTW actuaries for Barclays wouldn’t even estimate the GMP element of my pension when it is due to increase by a fixed rate until 65 on the basis that rules could change.
My pension was taken early on the basis of - value at deferment date plus annual increases to early retirement date less actuarial reduction (just under 40% for 9+ years).

If you add in future estimated increases you cannot then increase in deferment.

Maybe my brain has gone haywire but to me this cannot be right. You cannot revalue the deferred pension amount only to the early retirement date, and then further apply the rule about reduction from NRA.  This is negative double counting because it was never calculated forward to the NRA

This is the same point I made earlier.

I have just checked my final salary pension online. It gives my pension value in todays terms if I was to take it at 65. If I request an early retirement estimate it reduces the value at 65 by the early retirement factors.

Taking early retirement should not penalise a pension member, so the reduction to £14K for 10 years early seems punitive - assuming 2.5% pension increase each year to age 85, the three figures give the following:

age 55
£21,196 = £958,000
£14,000 = £644,000

age 65
£35,327 = £974,500

You can see that the original figures given (£35K  and £21K ) are broadly the same value, the new £14K quote carries a significant penalty. This is why I think there is an administration error. Given that magnitude of difference, if the previous early retirements have been calculated incorrectly (as seems to be claimed in the original post), the trustee would have to do something about reclaiming overpayments to early retirees who have a more generous pension than they are entitled to.

for @toolateforsums it might be worth checking the £35,327 from the quote you received is correct. You should have had a final pension statement when the pension became deferred. Look at the expected pension value at that point and multiply it by the relevant factor from the table here: https://www.legislation.gov.uk/uksi/2021/1308/made using the year in which your pension became deferred.

Tommyjw

Pat38493 said:

DT2001 said:

toolateforsums said:

From the original scheme administrators when I asked for a quotation

'The estimated pension at 65 is £35,327.69 pa. At 55 you would get 60% of this, ie £21,196.61 pa. '

It is very clear above how the rules are applied . I was 53 at the time . The 4% pa reduction has not changed since my enquiry.

Changing scheme administrators should not allow for this change to happen surely?Not without changing the scheme rules?

My origiinal post mentioned about the fact i had reduce my contribution level for around 2 years and taken redundancy without looking for alternative positions with the company which i could have done. Hence my original questions.

I’ve just reread part of this thread and cannot see how the bold statement above could be correct.
The scheme has closed so there are no benefits accruing and so the only change to the value of the pension would be any inflationary increases in deferment. 

WTW actuaries for Barclays wouldn’t even estimate the GMP element of my pension when it is due to increase by a fixed rate until 65 on the basis that rules could change.
My pension was taken early on the basis of - value at deferment date plus annual increases to early retirement date less actuarial reduction (just under 40% for 9+ years).

If you add in future estimated increases you cannot then increase in deferment.

Maybe my brain has gone haywire but to me this cannot be right. You cannot revalue the deferred pension amount only to the early retirement date, and then further apply the rule about reduction from NRA.  This is negative double counting because it was never calculated forward to the NRA

This is the "standard" approach.

Pension when you left multipled by known inflation up to now (e.g 55) . 10 year ERF then applied. 

Some (less than the above) Schemes will instead go - Pension when you left multiplied by known inflation up to now PLUS add on (e.g.) 2.5% per year for each year left til NRD, then apply ERF.

My experience is only mine, but of the Schemes i have and do work on, the first method is overwhelimgnly the most common.

Pat38493

Shimrod said:

This is the same point I made earlier.

I have just checked my final salary pension online. It gives my pension value in todays terms if I was to take it at 65. If I request an early retirement estimate it reduces the value at 65 by the early retirement factors.

Taking early retirement should not penalise a pension member, so the reduction to £14K for 10 years early seems punitive - assuming 2.5% pension increase each year to age 85, the three figures give the following:

age 55
£21,196 = £958,000
£14,000 = £644,000

age 65
£35,327 = £974,500

You can see that the original figures given (£35K  and £21K ) are broadly the same value, the new £14K quote carries a significant penalty. This is why I think there is an administration error. Given that magnitude of difference, if the previous early retirements have been calculated incorrectly (as seems to be claimed in the original post), the trustee would have to do something about reclaiming overpayments to early retirees who have a more generous pension than they are entitled to.

for @toolateforsums it might be worth checking the £35,327 from the quote you received is correct. You should have had a final pension statement when the pension became deferred. Look at the expected pension value at that point and multiply it by the relevant factor from the table here: https://www.legislation.gov.uk/uksi/2021/1308/made using the year in which your pension became deferred.

Yes - actually I was just about to work through an example but you have mainly it for me

If you take a theoretical example of a deferred pension that was deferred when you were 54 years old - the deferred pension figure, which by my understanding is what your pension should be if you magically turned 65 today, is £25K.

If you then assume 3% RPI or whatever growth per year to 65 and apply that compounded, you would get a pension of about £34.5K at 65.

On this thread 3 methods were proposed to calculate the early retirement figure at 55.

1) Take the 34.5K and then apply a 4% reduction per year giving pension £26.7K

2) Just apply the compounding directly at date of early retirement, giving pension £25.7K (similar number but the difference could be bigger in other scenarios)

3) Like 2 but then further apply the early pension penalty, giving a pension of £15.4K - substantially less than the deferred pension you were quoted only the prior year in today's real money.

As you rightly point out, this 3rd method makes no sense and it double penalises the person for retiring early, and substantially reduces the total expected liability to the pension scheme if you decide to do this.  

Also - if you run these same numbers on a scenario where the fund was frozen 10 years before you were 55 instead of only 1 year, with a deferred value of £20K leading to an estimated pension on NRA of about £36K - in this case using method 1 you get an answer of £21K.  Method 2 gives £26.8K, and method 3 gives £16K.  

And actually, if I run the numbers on several different scenarios with the gap between pension deferral and retirement on different numbers of years, but each with an expected NRA figure of around £35K, the only calculation that gives roughly the same ballpark result in all scenarios is 2 (which to be honest surprised me but there you go).

Therefore after running a few calcs, I unexpectedly came to the conclusion that number 2 is the "correct" way to do it.

Probably someone will come and tell me my maths is wrong as I am no expert - I just looked up how to use a few formulas in Excel.

I suspect that for the OP the admin has applied method 3, which to me cannot be correct as it unfairly penalises people for retiring early by substantially reducing the total expected liability on the scheme - it's probably as you point out that this could be just a simple admin error as it's also not even consistent with what was quoted by the OP in the email from one of his trustees, where the trustee described options 1 and 2.

Ironically, I suspect that when the admin correctly applies option 2 as described by the trustee, he will end up with a higher pension than he was expecting not a lower one.  

If anyone is saying that method 3 is in regular use, I would be interested to understand the justification for this as being in the interests of all members of the scheme, as it clearly penalises those who want to retire early more than is justified by the expected liabilities on the scheme.

Shimrod

toolateforsums said:

Marcon said:

Dazed_and_C0nfused said:

toolateforsums said:

zagfles said:

toolateforsums said:

Dazed_and_C0nfused said:

Then the fun starts. I then asked for a new db quotation to take in just over a years time , and am told that they have changed the calculation. I would now only receive a pension of 14k PA as they have changed pension administrators who didn't like the way early retirement was calculated

Do you really mean they changed the calculation or was it that the original calculation is now believed to be wrong?

This sort of thing will be set by the scheme rules - have you checked those?

They have changed the calculation method. The trust deed and rules state :

'The Deferred Member’s pension under this Rule 4.9A shall be the deferred pension to which he or she would have been entitled to on Normal Retirement Date under Rule 4.8 (Deferred Pension) reduced by the Early Retirement Discount.  '

'The Early Retirement Discount which will apply initially, on and from 1 October 2011, until the Trustees determine otherwise (having had regard to the Actuary’s advice), will be 4% for each complete year that the payment of the deferred pension precedes Normal Retirement Date'

That is how my original quotation for 21k pa was calculated. Very clear in the rules.

So the rules look like they allow the Trustees to change the early retirement discount.

I have checked and the 4% still applies for every year before NRD

Is this a deferred DB pension or one that you were still accruing additional pension?

Maybe the issue is with the starting point of the calculation not the actuarial reduction.

What was the initial 35k actually based on?

What's the betting:

• the first quote was based on revaluing (on a 'best guess') to NRD, then reducing that figure
• the current quote which was based on revaluation to the date on which OP asked for the quote, then reducing that figure?

Very clear in the rules that the Trustees can change the 4% after taking advice from the Actuary - but not at all clear which method is required to get to the starting (i.e. pre-discounted) figure.

From the trustee secretary: -

'On checking your file and reworking the calculations, done when XXXXXXXX were the administrator, it is clear that they based the Early retirement pensions on your estimated pension at Normal Retirement Date and then reduced it by the 4%.

 

YYYYYYYY, as the new administrators, have challenged this method and their administration and calculation system was set up under instruction from the Actuary to revalue only to the early retirement date. The rules of the scheme are not clear but do imply that that revaluation is to normal retirement date which is most unusual.'

 

Clearly a change in the calculation method and a significant one since changing scheme administrators.

Following the comments above, I come back to this post which is the one that caused my confusion, and rereading it, I think they both actually say the same thing and it is probably the method by which the calculation is done is different.

The statutory increase factor from legislation can only be applied to the early retirement date (current date) as the table is only updated once a year and provides retrospective calculations. Multiplying pension accrued at date of leaving by this factor satisfies the calculation process of statement two. The same could be said for statement one as the same calculation givens estimated pension at retirement date.

I wonder whether the first pension administrators have used more generous factors than statutory revaluation to calculate the estimated pension at retirement date. This may be entirely correct, some older pension schemes may have fixed increases (e.g. fixed 5% per annum).

Again it comes back to knowing what the pension rules say.

Pat38493

Tommyjw said:

Pat38493 said:

DT2001 said:

toolateforsums said:

From the original scheme administrators when I asked for a quotation

'The estimated pension at 65 is £35,327.69 pa. At 55 you would get 60% of this, ie £21,196.61 pa. '

It is very clear above how the rules are applied . I was 53 at the time . The 4% pa reduction has not changed since my enquiry.

Changing scheme administrators should not allow for this change to happen surely?Not without changing the scheme rules?

My origiinal post mentioned about the fact i had reduce my contribution level for around 2 years and taken redundancy without looking for alternative positions with the company which i could have done. Hence my original questions.

I’ve just reread part of this thread and cannot see how the bold statement above could be correct.
The scheme has closed so there are no benefits accruing and so the only change to the value of the pension would be any inflationary increases in deferment. 

WTW actuaries for Barclays wouldn’t even estimate the GMP element of my pension when it is due to increase by a fixed rate until 65 on the basis that rules could change.
My pension was taken early on the basis of - value at deferment date plus annual increases to early retirement date less actuarial reduction (just under 40% for 9+ years).

If you add in future estimated increases you cannot then increase in deferment.

Maybe my brain has gone haywire but to me this cannot be right. You cannot revalue the deferred pension amount only to the early retirement date, and then further apply the rule about reduction from NRA.  This is negative double counting because it was never calculated forward to the NRA

This is the "standard" approach.

Pension when you left multipled by known inflation up to now (e.g 55) . 10 year ERF then applied. 

Some (less than the above) Schemes will instead go - Pension when you left multiplied by known inflation up to now PLUS add on (e.g.) 2.5% per year for each year left til NRD, then apply ERF.

My experience is only mine, but of the Schemes i have and do work on, the first method is overwhelimgnly the most common.

OK really - well if you say that is what is happening and you are working in that area I have to take your word for it.  However, as Shimrod points out, this appears to dramatically reduce the liability on the scheme if the pensioner retires early and you assume they will live to the average life expectancy.  

In other words if you compare it to a DC scheme and see the pension as a pot of money used to pay your pension, by using this method, they effectively reduce the size of the pot available to you when you decide to retire early - that's what it seems to me anyway.

If I also take the example of the DB scheme that I was in:

Deferred pension on date of leaving = £16.4K.  Pension was deferred in May 2008.

I recently asked for a quote for retirement at NRA and retirement at age 57 and they gave me estimates of £28K and £18.3K respectively.

This appears to be consistent along the lines of the second method you mention.  If they had applied what you say is the "standard", they would be offering me a pension £16K for retirement age 57.  

Since I am planning to retire early, I am obviously interested to know if scheme trustees can just suddenly decide to switch to the method that will give me a much lower pension if I retire early, as this is important for retirement planning, or at least for deciding in which order to take pension assets.

(By the way all this is assuming I don't take a lump sum and I think the OP has never stated whether any lump sums were involved in the offers he was given - I am assuming that no lump sum is taken in all my examples).

bolwin1

Pat,

Whilst your maths seem correct to me, the assumptions you are making don't. 

The projected figure at NRA is just that - it's based on a series of assumptions about future inflation. 

The early retirement factor is used to take into account the pension is in payment for longer. Let's assume someone starts taking the pension at 55 & the NRA is 65. If the projected figure at NRA is used as the start point for the reduction, by the time NRA is reached, there would have effectively been 2 lots of inflation applied to it - this includes the the future inflation applied at the time the pension is drawn plus the 10 years of inflation from 55 to 65.

A worked model using your proposed method. If inflation averages out at 4% and the reduction is 4% for each year the pension is taken early, then everyone would take the pension early, as you'd end up at the same level of pension at NRA, but with the advantage of 10 years payments from 55 to 65. Clearly, that's not going to be viable for the pension scheme. 

It's also worth pointing out that comparing total pension drawn starting at 55 compared to total pension starting to be drawn at 65 does not show the full picture. 

Shimrod's numbers - 

age 55

£21,196 = £958,000

age 65

£35,327 = £974,500

The £958,000 figure is worth much more than the £974,500 as a significant chunk of it is drawn 10 years earlier pre inflation.