Legacy DB Pension Being Removed – What Are Our Options?

WhiteTiger_26

Glad it worked out well for you, and it’s encouraging to hear a positive outcome.

We used a pension calculator to model the impact of the proposed change, and the level of pension we’re projected to lose is substantial. Combined with current market uncertainty, moving from a guaranteed defined benefit pension to one that’s investment dependent is understandably worrying. It also affects the level of financial protection for our families.

A DB pension provides a guaranteed income for life, whereas a DC pension depends on investment performance and how long the pension pot lasts.

If, after every avenue has been explored, we ultimately lose our DB scheme, we simply hope our long service and loyalty as legacy staff are recognised. We would expect to be treated with respect, offered compensation that fairly reflects the value of what we’re giving up, and not be placed under the threat of dismissal and re-engagement. That would be a very different situation.

eskbanker

We used a pension calculator to model the impact of the proposed change, and the level of pension we’re projected to lose is substantial

Surely the outcome of such a comparison will be very sensitive to the assumptions used within it, i.e. using a different set could drive a very different result - which scenarios did you model (e.g. investment growth, indexation, etc)?

Aylesbury_Duck

https://forums.moneysavingexpert.com/discussion/comment/82075533#Comment_82075533

I agree. It's impossible to say with certainty that OP and their colleagues would be worse off. I would rather have the certainty of a DB pension of course, but as you say, a modest tweak to a couple of variables in either or both models could produce a significant difference in the outcome of each.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82075578#Comment_82075578

Exactly - when transferring DB pensions into DC ones was at its peak a few years ago, it was a very attractive option for many, but that depended heavily on individual circumstances and a range of other factors (albeit one was CETV, not relevant here), so was never a one-size-fits-all assessment…

Nebulous2

It happened to me - and it was the impetus I needed to change jobs.

The scheme was costly, and these costs were increasing. Only roughly 6% of the workforce were still in the pension scheme, and while I was very unhappy at losing it, I kind of agreed that it was unfair to others. Auto- enrolment was increasing their other pension costs in a sector where a lot of people traditionally didn't elect to join a pension.

Within 9 months I had a new role with a public sector pension. I transferred my pension in, and had some decent pay rises which led to me being able to retire early.

Like a lot of the people here are saying, it was unpleasant at the time, but I adjusted, and it worked out ok in the end.

Marcon

We used a pension calculator to model the impact of the proposed change, and the level of pension we’re projected to lose is substantial.

Did your modelling take into account the guaranteed growth of your DB pension once the scheme closes to future accrual and you all become deferred members of the DB scheme? If so, are you sure you've used the correct projections?

Combined with current market uncertainty, moving from a guaranteed defined benefit pension to one that’s investment dependent is understandably worrying. It also affects the level of financial protection for our families.

Completely understand that, which is why it's so important for you to be clear how things will pan out in future. In particular, make sure you understand the level of DB pension which would be payable to any spouse/civil partner/eligible children. Is there a death in service lump sum benefit with your employer - and if so, is it higher for those in the DC pension (frequently the case)? If not, that's a pretty good negotiating point and one which isn't going to cost the employer an arm and a leg to improve.

A DC scheme won't normally have the same options for ill health early retirement as a DB scheme. What provisions for sick leave does your employer offer - in particular, do they offer Permanent Health Insurance (aka salary replacement)?

A DB pension provides a guaranteed income for life, whereas a DC pension depends on investment performance and how long the pension pot lasts.

If you buy a lifetime annuity (with a pension for your spouse/civil partner if they outlive you), that does away with the concerns about how long the pot will last.

If, after every avenue has been explored, we ultimately lose our DB scheme, we simply hope our long service and loyalty as legacy staff are recognised.

Bear in mind that your long service and loyalty have already been recognised by the years of DB scheme membership you have all enjoyed - and of course the salary and perks you have received which have done so much to keep you loyal!

We would expect to be treated with respect, offered compensation that fairly reflects the value of what we’re giving up, and not be placed under the threat of dismissal and re-engagement.

Respect - definitely, but I wonder what exactly you mean by that?

You do need to be more realistic about compensation; it won't reflect the value of the DB pension, not least because nobody can calculate that with accuracy (who's to know how long you will still continue to work for this employer?) and because paying that sort of amount is hardly going to level the playing field with all the other staff who are not in a DB scheme. Most employers who close a DB scheme to future accrual don't give any sort of compensation.

As for dismissal and re-engagement - please see my earlier answer. The employer is simply explaining to you what the consequences of non-agreement would be; that's open and honest, not a gun to the head (although I appreciate it probably feels like that). What else could they say?

This is a deeply unsettling and unwelcome move, but it isn't a disaster. You still have a good slug of guaranteed retirement income as a result of your DB membership, and you are going to be building up more pension benefits during your period of DC membership.

GunJack

This happened in my company, with the DB closing end of 23/24 tax year, pension put into deferrement and joining the existing DC which was introduced in 2008 for new employees. It was a generous swap over, the DC is 8% employee (the DB was 7.5 %), 15% employer contributions and a 7.5k initial transfer bonus direct into the scheme.

As others have mentioned earlier, this changeover will enable me to fully retire 4-5 years earlier than if we'd have retained the DB, so rather than focus on the loss of tbe DB think about what it could mean for you in terms of it enabling you to possibly retire earlier 🙂

One point....part of the company rationale for winding up the DB, apart from the increasing running costs, is the way the DB scheme has to be reported in the company accounts. It does make for a very large liability on the balance sheet and makes the company look in a worse position than it actually is, something that shareholders really don't like (unsurprisingly 🤣🤣)

leosayer

My employer shifted us from DB to DC about 15 years ago and I became one of a handful of reps managing the comms between staff and the company.

We created a portal allowing staff to submit comments and questions which we collated and submitted to the company. The company's responses went onto the intranet.

I created a calculator for my own use that showed I would likely need to save over 30% of my salary in order to keep the same retirement benefits that I would be losing from the shift so it felt like a massive pay cut for everyone. This was mentioned in one of the comments and the company didn't question the numbers.

We did earn some minor concessions from the company but they weren't that useful. One was to do with allowing a link between DC and previously accrued DB benefits regarding tax free cash. I can't remember the other one.

Looking back, the company was probably a bit slow in making this change and the ongoing legacy of the DB commitment could be part of the reason why they're in a bit of trouble now. If you're looking for concessions then you'll probably have more luck ones that don't have a large ongoing cost eg. more holiday, flexible working etc. I think you're unlikely to get much more without the threat of industrial action.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82075514#Comment_82075514

 Combined with current market uncertainty, moving from a guaranteed defined benefit pension to one that’s investment dependent is understandably worrying. It also affects the level of financial protection for our families.

A DB pension provides a guaranteed income for life, whereas a DC pension depends on investment performance and how long the pension pot lasts.

What you say is correct. However it is worth saying that normally in the long term you would expect investment growth to be positive. People who have little/no experience of investing tend to have visions of their pension pot dropping dramatically in a bad scenario. For sure it will go up and down, but if sensibly invested in mainstream funds, you would normally expect it to grow above inflation over a long period. For sure it is not guaranteed, but it is much more likely than not to perform quite well.

In fact the main difference between the value of DB and DC pensions is not really the investing part, but the fact that normally a lot more money is paid into DB schemes by the employer. Often up to 25% compared to typically 3% to 12% for a DC scheme. If an employer was putting 25% into a DC scheme, then it is quite likely that the DC scheme would significantly outperform a DB scheme. Without the cast iron guarantee of course, but also with a good possibility of leaving a nice legacy.

Marcon

We did earn some minor concessions from the company but they weren't that useful. One was to do with allowing a link between DC and previously accrued DB benefits regarding tax free cash. I can't remember the other one.

That would only be a possibility if the DB and DC schemes are established under the same trust.

If you're looking for concessions then you'll probably have more luck ones that don't have a large ongoing cost eg. more holiday, flexible working etc. I think you're unlikely to get much more without the threat of industrial action.

It's a small group, so the threat of industrial action isn't going to worry the employer - who might in any case be quite happy to have a reason to part company with disgruntled employees. They might also be the sort of employer who stands firm when threatened, so suggesting a 'threat' might yield a better outcome may be wide of the mark.

As for extra benefits - one of the reasons for ending future accrual in the DB scheme is to try and get greater parity between those currently in the DB scheme and 'everyone else', which is always going to be a limiting factor.

If an employer was putting 25% into a DC scheme, then it is quite likely that the DC scheme would significantly outperform a DB scheme.

Depends how old the employee is when the 25% contributions start. As employees in DB schemes get older, the cost of providing their benefits increases considerably - another reason why closing a DB to future accrual as the scheme matures becomes ever more likely. For a DC scheme to match, let alone better, a DB scheme (depending of course on the structure of the DB scheme being used as a comparator, and the DC investment strategies used), a figure well above 'just' the employer's 25% is likely to be needed. I've seen mature schemes where the employer was contributing more than 100% of pensionable salaries in the period leading up to closure.