Selling the Golden Goose? (DB scheme pension swap for lump sum)

Albermarle

diddyflanker said:

Albermarle said:

Yes. It is a public sector scheme. I saw that for the lifetime allowance it is twenty times the pension figure hence my assumption that the Government would be 'buying' the pension on the cheap.

I think you might be mixing up two issues.

The 20X figure is an arbitrary one, and most people think it significantly undervalues DB pensions in terms of the LTA %. It also applies to private sector DB pensions. In reality is should be more like 35X.

It is totally unrelated to how the government funds your/public sector pensions, which is effectively by taxation receipts

Not mixing them up but using them as two measures of the same thing.
12X is what they offer.
20X, albeit an arbitrary one, is how they value it for comparison to the LTA
Indeed if your 35X is closer to the mark it makes it even more obvious that the 12X offered is extremely poor.

In addition, that they offer 12X to everyone no matter their age is significant.
A `12X offer to a 75 year old is going to be a lot more appealing than the same 12X offered to a 55 year old.

Still two different things though.
12X is the commutation rate offered by the pension. It is poor, but a decision by the scheme.

The 20X vs 35X argument about the real value of the pension, is not directly connected to the poor commutation rate.

As always it is swings and roundabouts, as although there is a poor commutation rate, the uncapped inflation increases are a great benefit, especially at the moment with most private sector DB pension having a cap of 3% or 5%, and most DC pension pots down around 20% in value this year. :'(

jimi_man

diddyflanker said:

Albermarle said:

Yes. It is a public sector scheme. I saw that for the lifetime allowance it is twenty times the pension figure hence my assumption that the Government would be 'buying' the pension on the cheap.

I think you might be mixing up two issues.

The 20X figure is an arbitrary one, and most people think it significantly undervalues DB pensions in terms of the LTA %. It also applies to private sector DB pensions. In reality is should be more like 35X.

It is totally unrelated to how the government funds your/public sector pensions, which is effectively by taxation receipts

Not mixing them up but using them as two measures of the same thing.
12X is what they offer.
20X, albeit an arbitrary one, is how they value it for comparison to the LTA
Indeed if your 35X is closer to the mark it makes it even more obvious that the 12X offered is extremely poor.

In addition, that they offer 12X to everyone no matter their age is significant.
A `12X offer to a 75 year old is going to be a lot more appealing than the same 12X offered to a 55 year old.

Agreed. I was in a public sector scheme and retired from it five years ago. The PCLS was linked to your age and in my case (aged 51 at the time) it was around 21.5x. However that isn't particularly great at aged 51 with potentially 35+ years of retirement ahead. I had no real use for the money (other than investing it) so it was an easy decision not to take it. But I was very much a rarity.

diddyflanker

Albermarle said:

...

Still two different things though.
12X is the commutation rate offered by the pension. It is poor, but a decision by the scheme.

The 20X vs 35X argument about the real value of the pension, is not directly connected to the poor commutation rate.

...

Yes, the first is the 'value' you can get if you sell it back to the Government and the latter is the paper 'value'. 
Both valuations and therefore worthy of comparison when you are deciding whether to sell or hold.

diddyflanker

jimi_man said:

diddyflanker said:

...

In addition, that they offer 12X to everyone no matter their age is significant.
A `12X offer to a 75 year old is going to be a lot more appealing than the same 12X offered to a 55 year old.

Agreed. I was in a public sector scheme and retired from it five years ago. The PCLS was linked to your age and in my case (aged 51 at the time) it was around 21.5x. However that isn't particularly great at aged 51 with potentially 35+ years of retirement ahead. I had no real use for the money (other than investing it) so it was an easy decision not to take it. But I was very much a rarity.

That so many, particularly 'early' retirees, sell their pension for what, in my opinion, seems to be such a significant under-valuation is worrying.
If this was a private firm doing the same I could see the miss-selling lawyers chasing the cases.

Albermarle

If this was a private firm doing the same I could see the miss-selling lawyers chasing the cases.

Although as they would be arguing against a small apparent flaw, in an otherwise gold plated, guaranteed, fully inflation linked pension, that the large majority of the population can only dream about, they might find sentiment was against them. 

diddyflanker

Albermarle said:

If this was a private firm doing the same I could see the miss-selling lawyers chasing the cases.

Although as they would be arguing against a small apparent flaw, in an otherwise gold plated, guaranteed, fully inflation linked pension, that the large majority of the population can only dream about, they might find sentiment was against them. 

I'm sure there would be plenty who would go for the letter of the law rather than any such 'spirit'.
The private/public pension provision and perception is always an emotive one, has been far easier for the private sector to degrade for their workers and, unfortunately, in response to the pilfering of private funds the legislation brought in to address such has driven private companies more and more to the poorer, cheaper, provisions.

Malthusian

diddyflanker said:

I'm sure there would be plenty who would go for the letter of the law rather than any such 'spirit'.

You know those tests that psychologists do where children are offered a marshmallow, or two marshmallows if they can sit there for five minutes without eating it?

Ever heard of a child's parents successfully suing the scientists because the scientists stole their child's marshmallow? After all, nobody could reasonably argue that the one marshmallow five minutes earlier is a better deal. Therefore it must have been misselling when their kid ate it.

Probably not. In this case we are talking about some people choosing two marshmallows, and some choosing two and a half marshmallows 15 years later.

Contrary to popular belief, there is nothing illegal about someone accepting a bad deal, even if it involves money. Neither in the letter nor the spirit of the law.

Misselling happens when professionals give bad advice, and defined benefit pension schemes don't advise people to take the lump sum option. They don't give advice at all.

The private/public pension provision and perception is always an emotive one, has been far easier for the private sector to degrade for their workers and, unfortunately, in response to the pilfering of private funds the legislation brought in to address such has driven private companies more and more to the poorer, cheaper, provisions.

It is easier for public sectors to maintain their gold-plated schemes because they have a bottomless pit of taxpayer's money.

Private pension funds have not been pilfered to any notable extent since Maxwell.

diddyflanker

Malthusian said:

diddyflanker said:

I'm sure there would be plenty who would go for the letter of the law rather than any such 'spirit'.

...

Contrary to popular belief, there is nothing illegal about someone accepting a bad deal, even if it involves money. Neither in the letter nor the spirit of the law.

Misselling happens when professionals give bad advice, and defined benefit pension schemes don't advise people to take the lump sum option. They don't give advice at all.

The private/public pension provision and perception is always an emotive one, has been far easier for the private sector to degrade for their workers and, unfortunately, in response to the pilfering of private funds the legislation brought in to address such has driven private companies more and more to the poorer, cheaper, provisions.

It is easier for public sectors to maintain their gold-plated schemes because they have a bottomless pit of taxpayer's money.

Private pension funds have not been pilfered to any notable extent since Maxwell.

Yes, I agree with your point on miss-selling. Surely if an adult is persuaded to buy a lemon they should take responsibility for that decision at some point. It's a fine line between making a mistake in the advice and deliberate fraud of course. The upshot of the miss-selling 'scandals' though is exactly the consequence you then go on to...the administrators of the DB schemes (and many others) simply refuse to give "advice".

The latter point wasn't about recent 'pilfering' rather that the legislation that came in following the Maxwell case encouraged the private sector to move away from DB schemes. The private sector managed to do this, imo, because their employees were ignorant at the time of just how much they were giving up - or were persuaded by the 'jam' they were offered at the time - and it is only now that the changes from back then are starting to kick in as those schemes reach maturity that people are realising just what it is they didn't fight for at the time.

The public sector have also had this, albeit to a far lesser extent, when the wholesale transition to career average from final salary schemes wasn't challenged with any great conviction. You only now have to look at the claimed £4bn bill that is the result of the illegal age discrimination element of that change to see just how much they have lost from their pension schemes because of the change.

Albermarle

The latter point wasn't about recent 'pilfering' rather that the legislation that came in following the Maxwell case encouraged the private sector to move away from DB schemes. The private sector managed to do this, imo, because their employees were ignorant at the time of just how much they were giving up - or were persuaded by the 'jam' they were offered at the time

In some cases there was no 'jam' . One large petrochemical company I worked for, bought a competitor who had a nice DB scheme. Due to TUPE etc nothing happened for a couple of years, but then proposals were put forward to replace the DB with a DC scheme. Staff and unions objected. Employer said if you do not agree we will shut the site down as being uneconomic. 

End of negotiation...... 

CheekyMikey

When I qualified for my db pension a few months ago, I debated this decision long and hard in my mind. My private sector pension commutation factor was 17, so not great, but I still chose to give up £6k of annual pension to get £100k lump. My reasoning was that I could either invest the 100k for decent returns, or add it to existing £50k cash, deposit it at best rates and not have to worry about selling any of my other investments for income. Over the next 7-10 years, my wife’s various work pensions will kick in, as will my state pension, so by 2032 we’ll have a combined £50k plus income and not had to touch any of our equity investments.

Given what’s happening with the markets now, I believe it was the correct decision to become quite cash rich and I sleep well. Personal circumstances always play a part, and I don’t know yours, but I’d say go for the lump sum if you’re anyway similar to me.