DB Pension revaluation for deferred members, early retirement calculation

NoMore

Having just became a deferred member of my Final Salary Scheme (one of the few still open private ones), I am checking my expected pension if I chose to retire early.

I have a copy of the early retirement factors for both Active and Deferred members, Active is just a straight 4% per year, however deferred is more complicated, the factors are not linear and there is a note underneath, that I'm seeking clarity on.

For relevant deferred, the factor should be applied to pension at Normal Retirement Date (NRD) /or earlier date member can take an unreduced pension. The pension should be increased between Date of Leaving (DOL) and that date (URD) as follows:

• between DOL and date of calculation, pension should be increased in line with known revaluation; and;

• between date of calculation and URD a rate of 2.6%pa should be used for future increases and 1.5% pa for CPI linked future increases.

I have a NRD of 65, and a URD of 60 with revaluation using CPI. I have just become deferred at age 53. So does the above mean, if I want to take my pension at 55. I will get CPI increase up to 55 on my pension, then they calculate an increase to age 60 using 1.5% pa and then apply the early retirement factor for 55 to that number? If assume whole years, then that's a 7.7% increase for the 5 years to 60 (1.5%^5)

Is this usual? I thought they would only calculate inflation increases to date of calculation (i.e. when I want to start it) not predict future inflation and add that.

If it is then despite the Early retirement factors being lower than the active, with this correction they don't end up too far off the actives.

hyubh

NoMore said:

Having just became a deferred member of my Final Salary Scheme (one of the few still open private ones), I am checking my expected pension if I chose to retire early.

I have a copy of the early retirement factors for both Active and Deferred members, Active is just a straight 4% per year, however deferred is more complicated, the factors are not linear and there is a note underneath, that I'm seeking clarity on.

For relevant deferred, the factor should be applied to pension at Normal Retirement Date (NRD) /or earlier date member can take an unreduced pension. The pension should be increased between Date of Leaving (DOL) and that date (URD) as follows:

• between DOL and date of calculation, pension should be increased in line with known revaluation; and;

• between date of calculation and URD a rate of 2.6%pa should be used for future increases and 1.5% pa for CPI linked future increases.

I have a NRD of 65, and a URD of 60 with revaluation using CPI. I have just become deferred at age 53. So does the above mean, if I want to take my pension at 55. I will get CPI increase up to 55 on my pension, then they calculate an increase to age 60 using 1.5% pa and then apply the early retirement factor for 55 to that number?

Probably yes, though the administrator should be able to confirm.

Is this usual?

For a private sector DB pension that doesn't use public sector style uncapped increases, it is.

I thought they would only calculate inflation increases to date of calculation (i.e. when I want to start it) not predict future inflation and add that.

My guess is revaluation is either statutory revaluation or otherwise capped (note though the wording you've quoted implies different components of your pension might carry different revaluation rates). Statutory revaluation for older service is CPI capped to 5%, for newer service CPI capped to 2.5%. While the cap applies to the overall period in deferment rather than on a year-by-year basis (this means, for a long period in deferment, a few years of high inflation may not actually affect things much, if at all), it's still capped. So what inflation rate you assume between leaving and retiring will affect how much the pension on retirement is in today's money.

If it is then despite the Early retirement factors being lower than the active, with this correction they don't end up too far off the actives.

You might look at it like this: for active members there is only one factor, how long is the typical member likely to live? The shorter that is, the more retiring (say) 5 years early will represent the lifetime pension being paid out for longer. Whereas, for a deferred member, there is also the inflation rate between now and retiring to factor in.

NoMore

You were right Hyubh, I have different components of my Pension, 

Post 1988 GMP Fixed rate (3.25% per year)	£ 1,029.60
Pre 97 pension - Statutory Revaluation	£ 4,814.83
Post 97 pension - Statutory Revaluation	£ 12,022.81
Post 2009 Pension - CPI Max 5%	£ 5,510.46
Post 2014 Pension - CPI Max 5%	£ 10,603.46
Total	£ 33,981.16

I became deferred on the 30 April 2025 (age 53), from my understanding, apart from the GMP, all the other sections will just be revalued by CPI (sept) next year, so why the need for the separating out of the individual sections? I know each is basically when something changed in the regulation, but at this point for me, unless I misunderstand something, each of them will basically have the same revaluation percentage applied (except GMP). 

Is that correct ? I know you are going to say ask the scheme, I did and the above is what they supplied.

I also have an email saying - 

I can advise that your benefits revalue in line with statutory revaluation while in deferment under the scheme.
This means that for benefits pre 2009 in excess of GMP benefits, these will increase at Retail Price Index (RPI) to a maximum of 5% reducing to 2.5% after 2009.  From April 2011 RPI was replaced by Consumer Price Index (CPI).

Which just confuses me as statutory revaluation for me (as I understand it) with deferment from April 2025 will be CPI ? So not sure why or where RPI comes in ?

DRS1

NoMore said:

You were right Hyubh, I have different components of my Pension, 

Post 1988 GMP Fixed rate (3.25% per year)	£ 1,029.60
Pre 97 pension - Statutory Revaluation	£ 4,814.83
Post 97 pension - Statutory Revaluation	£ 12,022.81
Post 2009 Pension - CPI Max 5%	£ 5,510.46
Post 2014 Pension - CPI Max 5%	£ 10,603.46
Total	£ 33,981.16

I became deferred on the 30 April 2025 (age 53), from my understanding, apart from the GMP, all the other sections will just be revalued by CPI (sept) next year, so why the need for the separating out of the individual sections? I know each is basically when something changed in the regulation, but at this point for me, unless I misunderstand something, each of them will basically have the same revaluation percentage applied (except GMP). 

Is that correct ? I know you are going to say ask the scheme, I did and the above is what they supplied.

I also have an email saying - 

I can advise that your benefits revalue in line with statutory revaluation while in deferment under the scheme.
This means that for benefits pre 2009 in excess of GMP benefits, these will increase at Retail Price Index (RPI) to a maximum of 5% reducing to 2.5% after 2009.  From April 2011 RPI was replaced by Consumer Price Index (CPI).

Which just confuses me as statutory revaluation for me (as I understand it) with deferment from April 2025 will be CPI ? So not sure why or where RPI comes in ?

CPI replaced RPI in 2011 but I think there was some question as to whether schemes could just ditch RPI or whether they would have to keep it for benefits accrued up to 2011.  It depends on how the rules were drafted.  Of course I may be barking up the wrong tree.  I am sure @Marcon can correct me if so.

I am not clear why your breakdown says CPI max 5% for post 2009 and post 2014 pension.  Surely those portions would be capped at 2.5%?

NoMore

I think 2.5% post 2014 is the minimum legally but my scheme has chosen to maintain the 5% cap so exceeding the minimum. Or it’s a typo on my statement

Marcon

DRS1 said:

NoMore said:

You were right Hyubh, I have different components of my Pension, 

Post 1988 GMP Fixed rate (3.25% per year)	£ 1,029.60
Pre 97 pension - Statutory Revaluation	£ 4,814.83
Post 97 pension - Statutory Revaluation	£ 12,022.81
Post 2009 Pension - CPI Max 5%	£ 5,510.46
Post 2014 Pension - CPI Max 5%	£ 10,603.46
Total	£ 33,981.16

I became deferred on the 30 April 2025 (age 53), from my understanding, apart from the GMP, all the other sections will just be revalued by CPI (sept) next year, so why the need for the separating out of the individual sections? I know each is basically when something changed in the regulation, but at this point for me, unless I misunderstand something, each of them will basically have the same revaluation percentage applied (except GMP). 

Is that correct ? I know you are going to say ask the scheme, I did and the above is what they supplied.

I also have an email saying - 

I can advise that your benefits revalue in line with statutory revaluation while in deferment under the scheme.
This means that for benefits pre 2009 in excess of GMP benefits, these will increase at Retail Price Index (RPI) to a maximum of 5% reducing to 2.5% after 2009.  From April 2011 RPI was replaced by Consumer Price Index (CPI).

Which just confuses me as statutory revaluation for me (as I understand it) with deferment from April 2025 will be CPI ? So not sure why or where RPI comes in ?

CPI replaced RPI in 2011 but I think there was some question as to whether schemes could just ditch RPI or whether they would have to keep it for benefits accrued up to 2011.  It depends on how the rules were drafted.  Of course I may be barking up the wrong tree.  I am sure @Marcon can correct me if so.

I am not clear why your breakdown says CPI max 5% for post 2009 and post 2014 pension.  Surely those portions would be capped at 2.5%?

You're right - the phrase used at the time in respect of the possible change was 'hard wired into the rules' (ie if the rules specifically said RPI, chances were that changing to CPI was going to be an issue).

Schemes don't have to stick to the statutory minimums; they can offer 'better' revaluation, and this is not the only scheme I've seen which apparently does so. I suspect that the references to post 2009 and post 2014 pension being capped at 5% are there to clarify the point, especially for anyone advising the member. 

Every so often we get someone on here criticising another poster because 'they should have been able to check for themselves if their pension looked right' or 'it's easy enough to work out for yourself'. This thread is a shining example of exactly where and why that sort of thinking can be hopelessly adrift from reality. What chance does the average member have when faced with this level of complexity and obscurity?

NoMore

Thanks @Marcon , indeed the more I investigate the harder it becomes to figure out. When I was still an active member I had a spreadsheet that calculated my expected pension at various ages and always matched my annual statement. Much easier to calculate then, now I’m trying to figure out how it works in deferment and it’s a nightmare. 

Any comment on my assumption that everything other than gmp will essentially be updated by cpi? 

Marcon

NoMore said:

Thanks @Marcon , indeed the more I investigate the harder it becomes to figure out. When I was still an active member I had a spreadsheet that calculated my expected pension at various ages and always matched my annual statement. Much easier to calculate then, now I’m trying to figure out how it works in deferment and it’s a nightmare. 

Any comment on my assumption that everything other than gmp will essentially be updated by cpi? 

As assumptions go it's not an unreasonable one. Picking up on your query above:

'I became deferred on the 30 April 2025 (age 53), from my understanding, apart from the GMP, all the other sections will just be revalued by CPI (sept) next year, so why the need for the separating out of the individual sections?'

It's because the administrators are using the same boilerplate for all active/deferred members, not all of whom will have service in each of these sections - and it's far easier/safer to use that approach, even if it doesn't make for helpful reading for members.

I've just re-read this whole thread and I don't follow why your statement says one thing but the email you've had from the administrators says another:

'I can advise that your benefits revalue in line with statutory revaluation while in deferment under the scheme.
This means that for benefits pre 2009 in excess of GMP benefits, these will increase at Retail Price Index (RPI) to a maximum of 5% reducing to 2.5% after 2009.'

I'd certainly go back to them and point out the discrepancy and ask them to confirm. While asking about that, you might also check whether early retirement factors are cast in stone in the rules (unlikely) or can be reviewed and changed by the trustees (much more probable).

In the interests of your own sanity, try not to get too hung up on the pinpoint accuracy of the numbers. If you're a precision merchant who forward plans, that comment will really grate (sorry - it's well meant!), but if I'm right and you can't predict what the early retirement factors will be if you apply to draw your pension early, you could give yourself a lot of interim grief for no really good purpose.

NoMore

I’m already aware the early retirement factors and the commutation factors can and will be changed. I regularly ask for updates and they have changed at least 3 times in the past 10 years. 

I get your point about trying to be exact but it’s more actually being able to compare to their quotes to check they are applying the calculations correctly. Plus I like to understand how it all works in detail. 

Yeah the email seems to be at odds with the statement. I have asked for a copy of the scheme rules but they take ages to respond up to 10 weeks. 

Marcon

NoMore said:

I’m already aware the early retirement factors and the commutation factors can and will be changed. I regularly ask for updates and they have changed at least 3 times in the past 10 years. 

I get your point about trying to be exact but it’s more actually being able to compare to their quotes to check they are applying the calculations correctly. Plus I like to understand how it all works in detail. 

Yeah the email seems to be at odds with the statement. I have asked for a copy of the scheme rules but they take ages to respond up to 10 weeks. 

Given you are only 53, that's plenty of time, so not really worth fretting about the reply time at this stage of things. They won't be supplying any early retirement quotes any time soon...

cloud_dog

NoMore said:

I’m already aware the early retirement factors and the commutation factors can and will be changed. I regularly ask for updates and they have changed at least 3 times in the past 10 years. 

I get your point about trying to be exact but it’s more actually being able to compare to their quotes to check they are applying the calculations correctly. Plus I like to understand how it all works in detail. 

Yeah the email seems to be at odds with the statement. I have asked for a copy of the scheme rules but they take ages to respond up to 10 weeks. 

Just a comment, may or may not be relevant for you.

I will be taking my deferred DB early, probably next year, and one of the unknows I had was how, or more specifically when they applied indexation to the pension.  Lots of good feedback on here but I had to enquire with the scheme administrators to be certain.  For my scheme they take the September inflation rate (published in October) and apply it (capped if necessary) on the 1st April each year.  It was the 'when' was indexation applied that was the last part of conundrum for me, as some schemes may apply a partial indexation during the year when commencing.