Does this message from Aptia/Mercer make sense?

Pat38493

Shimrod said:

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.

Update here - the provider has now sent me another email 3 weeks later (and one week after the requested payment date, but without the part about possible state pension reductions (they had previously answered my query saying that I can ignore that bit).

So 3 weeks later, they are still waiting for "the Aviva" which is still their terminology    

Interesting because my (admittedly very limited) experience of dealing with Aviva on pension topics in the past is that they were very quick and responsive.

DRS1

Interesting because my (admittedly very limited) experience of dealing with Aviva on pension topics in the past is that they were very quick and responsive.

That very much depends on which bit of Aviva you are dealing with.  Some bits move at the speed of molasses