Help! Final Salary Scheme closing.

anonn_2

Hi,

I am useless with pensions and was wondering if anyone could help?

I have been told today that we are entering into a consultation period as my company wants to change our final salary scheme to a Defined Contribution scheme. 

We have been told to seek Financial advice but its all too complicated for me to process and it is stressing me out!  

I have been in the scheme for 11 years and current pension is £27,000 - we have been told that instead of 18% the company will contribute 25% indefinitely. 

My current salary is just under £40,000. 

My husband says that I should be requesting compensation but have no idea where to start?

Any advice is much appreciated xx

Marcon

anonn_2 said:

Hi,

I am useless with pensions and was wondering if anyone could help?

I have been told today that we are entering into a consultation period as my company wants to change our final salary scheme to a Defined Contribution scheme. 

We have been told to seek Financial advice but its all too complicated for me to process and it is stressing me out!  

I have been in the scheme for 11 years and current pension is £27,000 - we have been told that instead of 18% the company will contribute 25% indefinitely. 

My current salary is just under £40,000. 

My husband says that I should be requesting compensation but have no idea where to start?

Any advice is much appreciated xx

Why do you need financial advice? If the scheme is going to close and the alternative is a DC scheme, the employer will have to contribute to that, and there won't be alternative options - but 25% is a thumping good contribution rate. You could always pay in more if you want a bigger pension. 

Your DB scheme is simply doing what the vast majority of such schemes in the private sector have done and are doing. Chances of compensation? Likely to be nil, unless membership of a DB scheme is a contractual entitlement (highly unlikely, but have a look at your terms of employment in case).

El_Torro

I'm no expert on DB pensions (never had one) but I'll give you my thoughts for free (worth every penny):

Over the years many DB pensions have closed, nothing unusual there. It's not clear from your post but you should be owed what you've accrued so far, you just can't add any more to the pension. 

If your employer is going to add 25% of your salary to a DC pension, and do it until you leave the company, this already looks like a very generous offer. Most people in DC employer pension schemes can only dream of such a contribution. 

What kind of compensation is your husband expecting? A higher salary? A lump sum? Something else? I've never heard of people getting compensation for this, though just because I haven't heard of it doesn't necessarily mean it's never happened. 

JoeCrystal

You are fortunate to have access to the DB pension scheme, let alone a final salary DB pension scheme.  First of all, find out exactly what you already have and their plan regarding the DB pension scheme, such as if it still retains the link to your final salary or is based on your salary at that point of closure. There are a lot of details, and the devils are in the details.

Frankly, 25% of your salary for a DC pension is far higher than an average employee usually would get. Indeed, the legal minimum is 3% of earnings between £6,240 and £50,270 for auto-enrollment. However, I would not say that it can contribute 25% indefinitely since that can be changed without any issues, and indeed, the employer contribution will drop heavily once they can get away with it. The fact that they are willing to pay 25% shows how costly it is for the employer to maintain the DB pension scheme in the first place. 

Indeed, most employees don't deal with the DB pension schemes in the private sector these days. They were all mostly closed to new joiners decades ago. So, naturally, once you retire, sit back, relax, and laugh all the way to the bank.

Brie

If your current salary is £40k and if the expected pension is £27k that's pretty darn good.  And that will be sitting there waiting for when you hit retirement.

And 25% employer contribution into a DC scheme is excellent!  My last employer changed their scheme to 10% so you're doing really well with this.  

Also - chances are these will be considered 2 completely separate pensions.  The DB will have certain conditions attached to it, perhaps a normal retirement date of 60 or 65 and the DC more likely 65 or even older.  Because they are effectively 2 separate pensions it may be possible to do different things will them.  Again at my last employer people were able to continue working and paying into their DC scheme but could also (if they were the right age) start collection their DB pension.  Not something you are likely to want to do if it would push you into a higher tax bracket but some found that by doing this they could cut their hours without actually having less income.  

The one cautionary note I would add - check if the £27k DB pension is dependent on you continuing to contribute at your current rate until retirement age.  Your annual pension statement might say something like "if you continue to pay into the scheme until X date your pension will be £27k."  But you won't of course be contributing to it any more so I would just double check on that so you aren't caught out with false expectations in the years to come.  

But don't panic. And no, no one gets compensation for this sort of business decision.  (unless they are in the executive scheme)

german_keeper

Just as an aside to the comments above are you sure you understand your pension position? 11 years service with a current salary of £40,000 giving a pension of £27,000? That's an accrual rate of about 1/16. I don't think there has ever been a DB scheme with that sort of accrual, even in the public sector.

pterri

german_keeper said:

Just as an aside to the comments above are you sure you understand your pension position? 11 years service with a current salary of £40,000 giving a pension of £27,000? That's an accrual rate of about 1/16. I don't think there has ever been a DB scheme with that sort of accrual, even in the public sector.

I suspect that the max you could get based on 40yrs service 1/60 * 40000 is £26666 

artyboy

...and make sure you are clear with your employer about whether your existing DB pension accrual will be preserved, ie you'll keep what you have amassed until now, and it's just a case that going forward, you'll get an extra DC pot of money on the new terms.

They may well try and 'encourage' you to transfer your DB benefits over, that's unlikely to be a good idea. Not sure if it would even be allowed without financial advice, given the current rules over CETVs above £30k, which yours surely must be...

SarahB16

artyboy said:

...and make sure you are clear with your employer about whether your existing DB pension accrual will be preserved, ie you'll keep what you have amassed until now, and it's just a case that going forward, you'll get an extra DC pot of money on the new terms.

They may well try and 'encourage' you to transfer your DB benefits over, that's unlikely to be a good idea. Not sure if it would even be allowed without financial advice, given the current rules over CETVs above £30k, which yours surely must be...

A good question from artyboy and my question leads on from it:  

Your current salary is £40k and I know you won't be able to accrue any additional years (i.e. the maximum will be 11) but say when you retire your salary is £50k.  What will your DB pension be calculated on, i.e. 11/60 x £40k (and I presume increased with CPI?) or will it be 11/60 x £50k?  

What you definitely don't want is a DB pension of 11/60 x £40k and for this to not increase by inflation.

I know there would be the DC pot on top but I would not accept 11/60 x £40k for the DB pension.   

Marcon

SarahB16 said:

artyboy said:

...and make sure you are clear with your employer about whether your existing DB pension accrual will be preserved, ie you'll keep what you have amassed until now, and it's just a case that going forward, you'll get an extra DC pot of money on the new terms.

They may well try and 'encourage' you to transfer your DB benefits over, that's unlikely to be a good idea. Not sure if it would even be allowed without financial advice, given the current rules over CETVs above £30k, which yours surely must be...

A good question from artyboy and my question leads on from it:  

Your current salary is £40k and I know you won't be able to accrue any additional years (i.e. the maximum will be 11) but say when you retire your salary is £50k.  What will your DB pension be calculated on, i.e. 11/60 x £40k (and I presume increased with CPI?) or will it be 11/60 x £50k?  

What you definitely don't want is a DB pension of 11/60 x £40k and for this to not increase by inflation.

I know there would be the DC pot on top but I would not accept 11/60 x £40k for the DB pension.   

You're forgetting something: the rules of the scheme. What OP might or might not want is irrelevant; what they will get will be their entitlement under the rules of the DB scheme. Deferred pensions increase in line with statutory requirements as a minimum, which has some link to inflation, but with a cap. So whether OP will get an inflationary increase depends on how much inflation is - and whether the DB will retain any sort of salary linkage. Given the hugely generous DC contribution, that seems unlikely in the extreme, since the employer could end up paying more than it would cost to just run the DB scheme, depending on the age/salary profile of the employees.

Marcon

german_keeper said:

Just as an aside to the comments above are you sure you understand your pension position? 11 years service with a current salary of £40,000 giving a pension of £27,000? That's an accrual rate of about 1/16. I don't think there has ever been a DB scheme with that sort of accrual, even in the public sector.

Actually there has...I've seen several in the financial services field which had accrual rates as high as 1/10, back in the 1980s when such things were still possible! 

I think you are spot on to flag the flaw in OP's thinking. The £27,000 they are hoping for is based on two-thirds of their current salary, and is doubtless based on benefit statements which project to the scheme's retirement date - not to the current date.

OP - I'm sorry if that sounds as if it's pouring cold water on your hopes, but it really is important to grasp the point.