Change to private pension actuarial factors and commutation rates

tojoslaffy1971

Hi

My private ‘final salary’ pension scheme has recently made changes to the Scheme’s actuarial factors and commutation rates.

As a result of these changes my reduced pension on retiring early in 3 years time at 57 has reduced by around £3500 and my lump sum has reduced by £20,000. I have 30 years service

The pension scheme manager has responded to my concerns stating that the changes made have not altered the fundamental benefits for members within the Scheme if retiring at normal retirement age. No notice of the change was given.

Are there any grounds on which I can challenge this change?

Thanks

JoeCrystal

No. The funds got to make sure the funds are fair and adjustments like these are perfectly normal as they need to take into accounts of gilts and all other factors. The manager is quite right in this matter, since your own benefits have not changed at your retirement age. The fact you think you 'lost' because you have a luxury of retiring earlier is not their problem. Would you complain in the same matters if it was the other way around? No, I don't think so.

daveyjp

Any final salary scheme has to show it is sustainable to pay all sums due. Most go through an actuarial assessment every few years and if it appears the pension is not sustainable changes will be made, This can be by changing the terms : increasing contributions, changing the final salary calculation, moving to career average, early payout deductions etc.

The pension will be reduced for early retirement as you will receive payments for longer, but in the long run the calculation is based on a recipient receiving the same amount based on life expectancy,

If an appeal is unlikely you have 3 years to plan deferring your final salary for a few years and reduce the impact of the reductions for early pay out.

hugheskevi

My private ‘final salary’ pension scheme has recently made changes to the Scheme’s actuarial factors and commutation rates.

As a result of these changes my reduced pension on retiring early in 3 years time at 57 has reduced by around £3500 and my lump sum has reduced by £20,000. I have 30 years service

Unless you have a very large pension, that is a big change.

It might suggest that the actuarial factors have not been updated since gilt yields started to increase back in early 2022.

The pension scheme manager has responded to my concerns stating that the changes made have not altered the fundamental benefits for members within the Scheme if retiring at normal retirement age. No notice of the change was given.

Are there any grounds on which I can challenge this change?

The only grounds for challenge would be that the change to the factors was either not done in accordance with the scheme rules, or that the calculations are incorrect. Both are unlikely.

Marcon

Any final salary scheme has to show it is sustainable to pay all sums due. Most go through an actuarial assessment every few years and if it appears the pension is not sustainable changes will be made, This can be by changing the terms : increasing contributions, changing the final salary calculation, moving to career average, early payout deductions etc.

The requirement is for triennial valuations as a minimum. There are strict limits on what can and can't be changed and by whom - it isn't just a case of 'oops, looks a bit short of cash, we'll change the rules'. All the examples you cite* would be subject to proper consultation with members before changes could be made to the rules - and any changes would apply to future benefits, not those already built up. It's more common to implement something known as a 'deficit recovery plan' to put a private sector scheme back on a healthy financial footing.

*with the exception of early retirement factors, unless those are explicitly specified in the rules of the scheme, which is very unusual.

It might suggest that the actuarial factors have not been updated since gilt yields started to increase back in early 2022.

Given that triennial valuations are (as the name suggests) events which take place every 3 years, I suspect that one triennial may have been signed off around then, and the latest one has taken such events into account. Most private sector schemes review early retirement and commutation factors once the results of their most recent triennial are known, so that would figure.

As a result of these changes my reduced pension on retiring early in 3 years time at 57 has reduced by around £3500 and my lump sum has reduced by £20,000. I have 30 years service 

The pension scheme manager has responded to my concerns stating that the changes made have not altered the fundamental benefits for members within the Scheme if retiring at normal retirement age. No notice of the change was given.

Notice doesn't have to be given to members unless the rules of the scheme or their terms of employment confirm that such notice will be given - and it's unlikely in the extreme that either will apply. Your scheme rules will say something along the lines of 'the trustees may change the actuarial factors at any time after taking advice from the Scheme Actuary'.These changes will have been happening a number of times during your 30 year membership, but for obvious reasons you are only now taking an interest!

Trustees can agree to such changes because as your pension manager has pointed out, they don't change a member's entitlements under the scheme. You would still be able to take an unreduced pension at Normal Retirement Age, and you don't have to commute (swap pension for tax free cash) if you don't like the terms on offer. The changes are also reasonable to take into account the security of benefits for all other members - you can't allow one member to benefit from bumper factors which could weaken the funding position for everyone else.

You say you are currently planning to retire early in 3 years, so there'll be another triennial valuation (and almost certainly a review of factors) before you start to draw your benefits. That might improve the picture for you - although you need to be aware that the reverse could also be true.