DB Pension Buyout

Pat38493

I received a letter from my deferred DB pension (deferred in May 2008) that the pension will go through a buy out by Aviva which will take about the next 18 months to finalise.

I believe that they already took an insurance approach to cover a chunk of the fund liabilities some years ago to prepare for this although I don’t really understand the full intricacies of it.

The letter says that this makes my pension safer and my benefits will be exactly the same.

Is there anything I should be concerned about here (e.g. loss of PPF protection or anything like that)?

Also - does this mean they will be more or less responsive to queries and so on?  The letter states that I will “receive an insurance policy” that covers my benefits.  This means that instead of taking my pension, I will claim on an insurance policy?  How does this affect the tax aspect?

xylophone

In return for the payment of a premium to Aviva, the Trustees and sponsoring employer are relieved of the risks and responsibilities of running the scheme which typically will wind up once Aviva has issued individual policies to scheme members.

The terms of the policy will set out  the member's benefits (which will match those of the ceding scheme) and when the time comes for him to draw his pension, Aviva will arrange for it to be paid.

Aviva will also take responsibility for the payment of any death benefits such as a pension for a widow.

It may be of some comfort to know that regulations require Aviva to hold surplus funds ("capital reserves") to meet their liabilities - they are set at such a level as  to enable the company to face extreme stress.

 As far as I can see, these policies are annuities and  if so would be classed as long term insurance contracts.

Thus if Aviva were to fail ( very unlikely), either another insurance company would be found to buy up the company or if this proved impossible, the FSCS would step in and cover the liabilities in full.

Marcon

Pat38493 said:

I received a letter from my deferred DB pension (deferred in May 2008) that the pension will go through a buy out by Aviva which will take about the next 18 months to finalise.

I believe that they already took an insurance approach to cover a chunk of the fund liabilities some years ago to prepare for this although I don’t really understand the full intricacies of it.

The letter says that this makes my pension safer and my benefits will be exactly the same.

Is there anything I should be concerned about here (e.g. loss of PPF protection or anything like that)?

Also - does this mean they will be more or less responsive to queries and so on?  The letter states that I will “receive an insurance policy” that covers my benefits.  This means that instead of taking my pension, I will claim on an insurance policy?  How does this affect the tax aspect?

It really isn't something to worry about - if anything, your pension is even more secure after a buy out than before.

Nothing will change for you, other than the fact that instead of dealing with your pension scheme administrators as you do at present, you'll deal direct with Aviva (they have in-house administration for buy outs). Impossible to know if they will be more or less responsive to queries, because (a) don't know how responsive your current administrators are and (b) don't know how Aviva will be. 

You don't need to claim on an insurance policy; you'd just apply to have your pension put into payment in the same way you would now. Your benefits will be paid automatically and your tax position would be the same as if you'd been receiving the pension from your trustees.

snowlaser

A buyout is basically good news for you.  Your pension (and its tax treatment) should be unchanged.  However, it's now backed by Aviva and the FSCS rather than your employer and the PPF.  You would expect Aviva to be more secure than your employer, and the FSCS to pay out more than the PPF in the (very unlikely) scenario there is any issue.

By the way, in case you're interested, I suspect that what they did a few years ago is a Buy IN (as opposed to a Buy OUT) which is where the pension scheme itself buys an insurance policy with Aviva and uses the policy to pay your pension.  That is good for the scheme as they no longer have as much risk to bear.  The final step of a Buy OUT is them effectively giving you your part of the overall policy (which no doubt covered hundreds of people's pensions) as an individual policy that covers just yours.  That way they can then wind up the pension scheme and leave you to get your pension from Aviva.

GunJack

hmmm...got me thinking.... In 2024 our DB is closing and we're being moved onto a DC instead (quite a generous one, it has to be said), but they have mooted the idea of potentially going to a buyout for the deferred DB. If in Buy-Out, how does that effect things like taking the pension before NRA?? I have asked the pensions mob but not sure they understood the question...

Marcon

GunJack said:

hmmm...got me thinking.... In 2024 our DB is closing and we're being moved onto a DC instead (quite a generous one, it has to be said), but they have mooted the idea of potentially going to a buyout for the deferred DB. If in Buy-Out, how does that effect things like taking the pension before NRA?? I have asked the pensions mob but not sure they understood the question...

You'll have the same options as you do now in respect of taking your pension before NRA (and probably in all, or virtually all, other respects), although the early retirement factors could well be different - better or worse, depending on market conditions at the time (which is also true of the scheme as it is now).

What is true of a buy out is that almost all trustee discretions are removed, and benefits are 'coded' as far as possible to provide certainty and simplicity for all parties, not least the insurer who is taking on the liabilities.

Pat38493

snowlaser said:

A buyout is basically good news for you.  Your pension (and its tax treatment) should be unchanged.  However, it's now backed by Aviva and the FSCS rather than your employer and the PPF.  You would expect Aviva to be more secure than your employer, and the FSCS to pay out more than the PPF in the (very unlikely) scenario there is any issue.

By the way, in case you're interested, I suspect that what they did a few years ago is a Buy IN (as opposed to a Buy OUT) which is where the pension scheme itself buys an insurance policy with Aviva and uses the policy to pay your pension.  That is good for the scheme as they no longer have as much risk to bear.  The final step of a Buy OUT is them effectively giving you your part of the overall policy (which no doubt covered hundreds of people's pensions) as an individual policy that covers just yours.  That way they can then wind up the pension scheme and leave you to get your pension from Aviva.

Does this have any impact on the advice or permissions I would need if I ever wanted to transfer the benefits to DC - it’s unlikely I would want to do this but it’s always good to have options.  

Marcon

Pat38493 said:

snowlaser said:

A buyout is basically good news for you.  Your pension (and its tax treatment) should be unchanged.  However, it's now backed by Aviva and the FSCS rather than your employer and the PPF.  You would expect Aviva to be more secure than your employer, and the FSCS to pay out more than the PPF in the (very unlikely) scenario there is any issue.

By the way, in case you're interested, I suspect that what they did a few years ago is a Buy IN (as opposed to a Buy OUT) which is where the pension scheme itself buys an insurance policy with Aviva and uses the policy to pay your pension.  That is good for the scheme as they no longer have as much risk to bear.  The final step of a Buy OUT is them effectively giving you your part of the overall policy (which no doubt covered hundreds of people's pensions) as an individual policy that covers just yours.  That way they can then wind up the pension scheme and leave you to get your pension from Aviva.

Does this have any impact on the advice or permissions I would need if I ever wanted to transfer the benefits to DC - it’s unlikely I would want to do this but it’s always good to have options.  

No. You'd still need regulated advice if your transfer value is £30,000+ and you are transferring to an arrangement which permits you to flexibly access your benefits.

Pat38493

Marcon said:

What is true of a buy out is that almost all trustee discretions are removed, and benefits are 'coded' as far as possible to provide certainty and simplicity for all parties, not least the insurer who is taking on the liabilities.

Well if this is true, I will be interested to see if Aviva provides some kind of online interface where you can get retirement predictions on demand for your policy - if the rules are coded, then this should mean that it is possible to program a screen which allows me to get my pension estimate for any given retirement date on demand.

Somehow, I doubt this will be possible though and I will still have to put in an application and wait weeks or months to get one.

Gary1984

I doubt they'd provide an estimate of your pension as it depends on inflation which is unknown.

Marcon

Pat38493 said:

Marcon said:

What is true of a buy out is that almost all trustee discretions are removed, and benefits are 'coded' as far as possible to provide certainty and simplicity for all parties, not least the insurer who is taking on the liabilities.

Well if this is true, I will be interested to see if Aviva provides some kind of online interface where you can get retirement predictions on demand for your policy - if the rules are coded, then this should mean that it is possible to program a screen which allows me to get my pension estimate for any given retirement date on demand.

Somehow, I doubt this will be possible though and I will still have to put in an application and wait weeks or months to get one.

Although coding the rules doesn't mean they can predict inflation (would be great if it did!), it's possible there may be some sort of online 'estimator', albeit one which will be hedged around with a whole load of caveats to take account of the unknowns. That won't be something the trustees can tell you until much nearer the time of the buy out - or more likely Aviva will confirm after the buyout. The larger the scheme, the greater the chance of such a feature being automated and available to members, but it will take time, so don't expect it to appear miraculously as a feature the day after buyout is accomplished.