Does this message from Aptia/Mercer make sense?

Pat38493

Marcon said:

Albermarle said:

xylophone said:

I've become acquainted with a few of the big DB schemes over the years but never known anyone who was part of a buy out.

As far as I can gather, a full buy out enables wind up of the scheme, thus relieving the Trustees of any responsibility as this is assumed by
the insurer.  

In effect, each pensioner  becomes an annuitant of the insurer who takes over payment/admin/customer service via the individual policy.

I had thought that the buy out enabled each pensioner to enjoy the same benefits as provided by the  original scheme, so presumably 

early retirement would be covered.

I seem to remember reading that it was even possible for the Trustees to negotiate enhanced benefits.

You will need to check your position - I hope you'll find a reliable source of information.... ( not anyone who's been "on the sauce"...... ).

My Wife's DB pension was a buy out many years ago, and the only correspondence she receives is from the insurer ( Legal and General ).
My own DB pension has recently been the subject of a buy in ( with Just) but as it was already in payment via Mercer/Aptia ( after much initial hassle) I have not seen any change at all.
Like with the OP a buy out is planned at some point.

Your wife will only receive correspondence from L&G because the original trust will have been dissolved long ago, and her relationship is now entirely with the insurer who provides her benefits.

Your own pension is only at the buy in stage, so you shouldn't see any sort of difference. Effectively the trustees' policy with Just is simply an 'investment asset' of the scheme, and the trustees remain responsible for the provision of pensions administration and payment of pensions until the buy out stage has been reached.

One thing I don’t get about this is that always thought the protected tax status of pensions was dependent on them being held in trust.  If they are now an insurance policy, how can tax free PCLS be paid?

DRS1

Pat38493 said:

Marcon said:

Albermarle said:

xylophone said:

I've become acquainted with a few of the big DB schemes over the years but never known anyone who was part of a buy out.

As far as I can gather, a full buy out enables wind up of the scheme, thus relieving the Trustees of any responsibility as this is assumed by
the insurer.  

In effect, each pensioner  becomes an annuitant of the insurer who takes over payment/admin/customer service via the individual policy.

I had thought that the buy out enabled each pensioner to enjoy the same benefits as provided by the  original scheme, so presumably 

early retirement would be covered.

I seem to remember reading that it was even possible for the Trustees to negotiate enhanced benefits.

You will need to check your position - I hope you'll find a reliable source of information.... ( not anyone who's been "on the sauce"...... ).

My Wife's DB pension was a buy out many years ago, and the only correspondence she receives is from the insurer ( Legal and General ).
My own DB pension has recently been the subject of a buy in ( with Just) but as it was already in payment via Mercer/Aptia ( after much initial hassle) I have not seen any change at all.
Like with the OP a buy out is planned at some point.

Your wife will only receive correspondence from L&G because the original trust will have been dissolved long ago, and her relationship is now entirely with the insurer who provides her benefits.

Your own pension is only at the buy in stage, so you shouldn't see any sort of difference. Effectively the trustees' policy with Just is simply an 'investment asset' of the scheme, and the trustees remain responsible for the provision of pensions administration and payment of pensions until the buy out stage has been reached.

One thing I don’t get about this is that always thought the protected tax status of pensions was dependent on them being held in trust.  If they are now an insurance policy, how can tax free PCLS be paid?

I think you are confusing the tax free lump sum with the lump sum paid on death.

But bear in mind that both tax free lump sums and death benefits can be paid from personal pensions which are basically just insurance policies.

The discretion which matters for the death benefit lump sum will presumably pass to the insurance company - assuming there is any lump sum death benefit.

Pat38493

Marcon said:

These are individual policies, spelling out the terms of exactly what is covered, so there are no other members of the scheme to take into account in the same way there'd be in an ongoing DB scheme. Things like ERF factors will be for the insurer to decide, and may vary depending on market conditions; they aren't set in stone (indeed, doing so could be against the interests of members), unless the original trust document set them in stone and this was replicated in the buy out.

Thanks Marcon.  I spent some time last night reading through some of the links about pension buy outs and I also found a large brochure about it.

If I was the trustee of a pension scheme, I would be very concerned about agreeing to a buy out unless I was comfortable that "market conditions" for things like actuarial adjustments, would in future be calculated in a way that is fair to the member/future customer.  i.e., such adjustments need to be done based on an plausible and independently auditable and realistic assessement of external market conditions, and not based on an assessement of current market conditions of the insurer itself and whether the actuary wants a Christmas bonus for increasing the profit of the insurer. (I exagerate but you get the point).

If I was not comfortable that whis would be the case for all deferred members in perpetuity, I would not agree to the buy out.

I would keep in mind that the duty of trustees to operate in the interests of members is being removed as a safeguard, and furthermore, this is not a normal insurance policy like car insurance - the former member does not have the ability to take their business elsewhere if the calculations are being distorted artificially in the insurer's favour in future.

Perhaps this is governed by regulations that the insurer must use fair market assessments for such things, but if not, I would be looking for a way to hard code that into the rules or not proceed.

Pat38493

xylophone said:

"

Re SPD, do you have your old scheme guide? Are you sure that there is nothing about  SPD/integration/clawback?

I have just dug out my folder of pension information - I have the original scheme booklet which I was given in 1992.

I also have another booklet that is dated 1999.

I also have lots of other subsequent documents with quotes, deferred value statements etc.

There is nothing that I can find in any of the documents that mentions anything about State pension deduction.  In the later booklet, it explicitly says that the calculated amount will be paid until you die.

Therefore I have written to Mercer/Aptia to ask them why they included this comment in their email to me.

I also found a very interesting section in the old booklet which I will post a different question about as it's a different topic.

Marcon

Pat38493 said:

Marcon said:

These are individual policies, spelling out the terms of exactly what is covered, so there are no other members of the scheme to take into account in the same way there'd be in an ongoing DB scheme. Things like ERF factors will be for the insurer to decide, and may vary depending on market conditions; they aren't set in stone (indeed, doing so could be against the interests of members), unless the original trust document set them in stone and this was replicated in the buy out.

Thanks Marcon.  I spent some time last night reading through some of the links about pension buy outs and I also found a large brochure about it.

If I was the trustee of a pension scheme, I would be very concerned about agreeing to a buy out unless I was comfortable that "market conditions" for things like actuarial adjustments, would in future be calculated in a way that is fair to the member/future customer.  i.e., such adjustments need to be done based on an plausible and independently auditable and realistic assessement of external market conditions, and not based on an assessement of current market conditions of the insurer itself and whether the actuary wants a Christmas bonus for increasing the profit of the insurer. (I exagerate but you get the point).

If I was not comfortable that whis would be the case for all deferred members in perpetuity, I would not agree to the buy out.

You've missed the key point. A pension scheme has done its job - ditto the trustees and sponsoring employer - if the members get the benefits to which they are entitled under the Trust Deed & Rules. Normally that is a pension based on a given formula, as set out in the TD&R, when they reach the scheme's Normal Retirement Age. 

If members want to do something else, such as retire early (and in most ongoing schemes that requires the consent of the trustees and/or the employer), they don't have to accept the terms offered by a buy out provider if they don't like them, any more than they have to accept the terms offered by trustees of an ongoing scheme. 

There's a reason pension scheme trustees get a lot of training and a lot of advice, especially when they are looking at a buy in/buy out - and if the employer has the right to trigger a wind up, with no provision for the trustees to delay and go on running the scheme while they think about everything, the trustees have no choice but to get on with it. It's frequently novel territory for most of them and they need to be comfortable that they are 'doing the right thing' - which is why a professional trustee is often brought on board to bolster the process/confidence levels. 

The big attraction for the members is the security a buy out provides - no more worrying about whether the employer will fail and the pension scheme will be underfunded and it'll go into the PPF with all the delays and uncertainty and reduction etc etc. Once the benefits have been bought out, there is 100% FSCS protection. Set against that level of protection and peace of mind, maybe fretting about whether someone might come along in 20 years and want to retire early, but doesn't like the terms offered at the time, isn't going to be a major derailer, even for the most nervous and newest of trustees.

Pat38493

Marcon said:

Pat38493 said:

Marcon said:

These are individual policies, spelling out the terms of exactly what is covered, so there are no other members of the scheme to take into account in the same way there'd be in an ongoing DB scheme. Things like ERF factors will be for the insurer to decide, and may vary depending on market conditions; they aren't set in stone (indeed, doing so could be against the interests of members), unless the original trust document set them in stone and this was replicated in the buy out.

Thanks Marcon.  I spent some time last night reading through some of the links about pension buy outs and I also found a large brochure about it.

If I was the trustee of a pension scheme, I would be very concerned about agreeing to a buy out unless I was comfortable that "market conditions" for things like actuarial adjustments, would in future be calculated in a way that is fair to the member/future customer.  i.e., such adjustments need to be done based on an plausible and independently auditable and realistic assessement of external market conditions, and not based on an assessement of current market conditions of the insurer itself and whether the actuary wants a Christmas bonus for increasing the profit of the insurer. (I exagerate but you get the point).

If I was not comfortable that whis would be the case for all deferred members in perpetuity, I would not agree to the buy out.

You've missed the key point. A pension scheme has done its job - ditto the trustees and sponsoring employer - if the members get the benefits to which they are entitled under the Trust Deed & Rules. Normally that is a pension based on a given formula, as set out in the TD&R, when they reach the scheme's Normal Retirement Age. 

If members want to do something else, such as retire early (and in most ongoing schemes that requires the consent of the trustees and/or the employer), they don't have to accept the terms offered by a buy out provider if they don't like them, any more than they have to accept the terms offered by trustees of an ongoing scheme. 

There's a reason pension scheme trustees get a lot of training and a lot of advice, especially when they are looking at a buy in/buy out - and if the employer has the right to trigger a wind up, with no provision for the trustees to delay and go on running the scheme while they think about everything, the trustees have no choice but to get on with it. It's frequently novel territory for most of them and they need to be comfortable that they are 'doing the right thing' - which is why a professional trustee is often brought on board to bolster the process/confidence levels. 

The big attraction for the members is the security a buy out provides - no more worrying about whether the employer will fail and the pension scheme will be underfunded and it'll go into the PPF with all the delays and uncertainty and reduction etc etc. Once the benefits have been bought out, there is 100% FSCS protection. Set against that level of protection and peace of mind, maybe fretting about whether someone might come along in 20 years and want to retire early, but doesn't like the terms offered at the time, isn't going to be a major derailer, even for the most nervous and newest of trustees.

I don't doubt the benefits of a DB pension being bought out, especially for members who are already in payment where the rules are much more easily set in stone.  However are you sure we are not at cross purposes here?  You are referring to schemes where the ability to take retirement benefits at a date other than the normal retirement age is discretionary?

In the scheme where I am a deferred member (and I suspect a lot of other schemes), this is not a discretionary item - I have the pension rules handbooks going back to when I first started with the company and they all say that you can take your benefits early (from age 50 in fact which is another interesting point!), and it does not state that this is at the discretion of the trustees or sponsoring employer.  The scheme is not distressed - in surplus at the last valuation and the sponsoring company is solvent and a going concern.

The handbook sets out a series of adjustments that will be made, most of which would only be relevant to members retiring directly from service. (no longer relevant for anybody since 2008).

The clause which would be relevant for defered members:

"Your pension will be reduced to take account of the longer period during which it will be paid"

(Later on it does state that there is an exception where an employee may be able to retire up to 5 years before NRA at the discretion of trustees with zero deduction - maybe I'll apply for that!).

Beyond this there is a further complication if you want to get right into the weeds - the scheme might have a headline normal retirement age of 65, but for many members, there is really no such thing as a normal retirement age as they have separate tranches of pension, one of which has a different NRA.  As such, no matter what age the member takes the benefits, either ERF or LRF will come into play somehow.

Therefore in the end, a trustee would need to be concerned about whether the an insurer would have a materially different definition of “to take account of” in the clause set out above, than the trustees when the scheme was in trust, and whether this could have future legal ramifications for former trustees.

My first concern would be to avoid an insurer from profiteering in future from naive pensioners who want to take their benefits early, and setting ridiculously high ERF.

Second concern would be to avoid the insurer de facto removing the right from the rules to take benefits early by setting the factors so unfair, that nobody would ever do that e.g. 99.9%.  Especially given that the trustees have already written to all members stating that the buy out will not affect their pension or rights in any way - i.e. hostage to fortune if the ERF caluclations are materially changed to the member's disadvantage.

If this cannot be legally avoided, then at the least, a letter should go out to all deferred members, strongly advising them that if they want to exercise their rights to take their benefits early, after the buyout is complete, they should engage a financial adviser to check that the offer that is being made to them is fair, and they should consider the offer as a negotiating position and not a final offer by the insurer.

In other words they should keep in mind that they are no longer dealing with a trust - they are now dealing with the same insurance company that likes to try and increase their car insurance quote by 20% if they try to renew with the same company each year.

As a trustee, surely you should keep in mind that not all members are financially savvy frequenters of the pensions board at MSE and they might assume, perhaps wrongly, that any deductions for early retirement are being calculated fairly.

xylophone

 I vaguely remembered that this topic had come up before and found this thread which may be may be of interest.

https://forums.moneysavingexpert.com/discussion/6489382/boots-pension-defined-benefit/p1

Pat38493

xylophone said:

 I vaguely remembered that this topic had come up before and found this thread which may be may be of interest.

https://forums.moneysavingexpert.com/discussion/6489382/boots-pension-defined-benefit/p1

Thanks Xylophone for reminding us of this thread. 

This seems to be mainly about the exact same clause that was in my scheme back in the 90s - discretionary right to retire with no reduction 5 years early.  If I thought there was the slightest chance this would be honoured today I would not be putting my DB into payment early - I am sure they don't allow this anymore as I have in the past seen the ERFs that were in use a few years ago and they started from 1 year before NRA.

I also came across this document which makes interesting reading about pension buy outs.  Pages 28 and 29 in particular discuss the need for trustees to consider ERF, commutations and CETV approaches when considering the insurance company for a buy out.  They may also need to weigh up the security of having secure benefits against the willingness of the employer to pay extra to secure existing methodologies for ERF and so on.  In my case, I have received a letter where they stated that all benefits will be the same and everything will be matched, and they have already stated that they have chosen a buy out partner i.e. Aviva.

It also mentions that if the sponsoring employer is not in a desperate rush, it can make sense to prepare the scheme for buy out, and then wait for optimal market conditions - in some cases this can even result in securing better terms for members than what they had before if there is competition between insurers to get the business.

https://www.rothesay.com/media/lrldsuti/buyout-report-2016.pdf

Shimrod

Pat38493 said:

Marcon said:

Pat38493 said:

Marcon said:

These are individual policies, spelling out the terms of exactly what is covered, so there are no other members of the scheme to take into account in the same way there'd be in an ongoing DB scheme. Things like ERF factors will be for the insurer to decide, and may vary depending on market conditions; they aren't set in stone (indeed, doing so could be against the interests of members), unless the original trust document set them in stone and this was replicated in the buy out.

Thanks Marcon.  I spent some time last night reading through some of the links about pension buy outs and I also found a large brochure about it.

If I was the trustee of a pension scheme, I would be very concerned about agreeing to a buy out unless I was comfortable that "market conditions" for things like actuarial adjustments, would in future be calculated in a way that is fair to the member/future customer.  i.e., such adjustments need to be done based on an plausible and independently auditable and realistic assessement of external market conditions, and not based on an assessement of current market conditions of the insurer itself and whether the actuary wants a Christmas bonus for increasing the profit of the insurer. (I exagerate but you get the point).

If I was not comfortable that whis would be the case for all deferred members in perpetuity, I would not agree to the buy out.

You've missed the key point. A pension scheme has done its job - ditto the trustees and sponsoring employer - if the members get the benefits to which they are entitled under the Trust Deed & Rules. Normally that is a pension based on a given formula, as set out in the TD&R, when they reach the scheme's Normal Retirement Age. 

If members want to do something else, such as retire early (and in most ongoing schemes that requires the consent of the trustees and/or the employer), they don't have to accept the terms offered by a buy out provider if they don't like them, any more than they have to accept the terms offered by trustees of an ongoing scheme. 

There's a reason pension scheme trustees get a lot of training and a lot of advice, especially when they are looking at a buy in/buy out - and if the employer has the right to trigger a wind up, with no provision for the trustees to delay and go on running the scheme while they think about everything, the trustees have no choice but to get on with it. It's frequently novel territory for most of them and they need to be comfortable that they are 'doing the right thing' - which is why a professional trustee is often brought on board to bolster the process/confidence levels. 

The big attraction for the members is the security a buy out provides - no more worrying about whether the employer will fail and the pension scheme will be underfunded and it'll go into the PPF with all the delays and uncertainty and reduction etc etc. Once the benefits have been bought out, there is 100% FSCS protection. Set against that level of protection and peace of mind, maybe fretting about whether someone might come along in 20 years and want to retire early, but doesn't like the terms offered at the time, isn't going to be a major derailer, even for the most nervous and newest of trustees.

(Later on it does state that there is an exception where an employee may be able to retire up to 5 years before NRA at the discretion of trustees with zero deduction - maybe I'll apply for that!).

Therefore in the end, a trustee would need to be concerned about whether the an insurer would have a materially different definition of “to take account of” in the clause set out above, than the trustees when the scheme was in trust, and whether this could have future legal ramifications for former trustees.

My first concern would be to avoid an insurer from profiteering in future from naive pensioners who want to take their benefits early, and setting ridiculously high ERF.

Second concern would be to avoid the insurer de facto removing the right from the rules to take benefits early by setting the factors so unfair, that nobody would ever do that e.g. 99.9%.  Especially given that the trustees have already written to all members stating that the buy out will not affect their pension or rights in any way - i.e. hostage to fortune if the ERF caluclations are materially changed to the member's disadvantage.

As a trustee, surely you should keep in mind that not all members are financially savvy frequenters of the pensions board at MSE and they might assume, perhaps wrongly, that any deductions for early retirement are being calculated fairly.

To address a couple of your concerns, insurers are legally obligated to offer fair value to the policy holders, so they cannot set early or late retirement factors to provide maximum benefit for themselves. Oddly, Trustees do not have the same obligation, so you may find in buyout (as in my case) that the early retirement factors (and commutation factors) are more generous that previously.

When going through the buyout process, the trustees along with advisors will define the set of benefits that they are securing with the insurance company - this cannot be worse than  the benefits you currently have, but will also see the removal of any discretionary options - for the simple reason that these cannot be easily priced and there will be no trustee to exercise the discretion. In the example you give above for early retirement with no reduction - do you know if that discretion has ever been exercised? I suspect it would require augmentation into the fund from the company and they may not wish to take on extra pension costs.

The whole process of going through buy-out takes a long time - I am going through one currently as a trustee which started in 2021 and probably has still another year to complete. The insurance company wants as clean a set of data as possible, and we have been through a number of data validation and verification exercises to trace members -as well as completing various equalisation exercises. 

Residual risk cover is taken out to cover the trustees and scheme for a period of time after the buy-out is completed - this is expensive (around 1% of the buy-out cost) and a sponsoring company may choose to offer some form of indemnity or hybrid cover instead. 

As a trustee we always have to act in the best interests of the members - but bear in mind that is the collective membership and decisions should not be taken that favour one group of members over another.

Pat38493

Thank you Shimrod that is definitely reassuring as I was wondering exactly this - whether the insurer is obliged to offer some kind of reasonable or fair value.

For my deferred DB scheme, they wrote to me nearly 2.5 years ago saying that they were planning to proceed with a buy out and it was expected to take around 18 months.  Probably this was pretty optimistic as I’ve heard nothing since, and the fact that I am still interacting with Aptia / Mercer indicates that we are not beyond buy in stage.

As regards the clause about taking full benefits 5 years early, I have no idea whether it has ever been used, but I highly doubt that it has been used since the scheme was closed to new entrants and contributions.  I would guess that if the trustees are taking their duties seriously, they would either have to let everyone do it, or nobody, or use it as a potentially lower cost backdoor to ill health retirement.  If they only let some people do that, it would open them up to accusations of breach of trust presumably.