Baroness Ros Altmann, a former UK Pensions Minister is of the opinion that ‘the cash equivalent transfer values are so attractive and the freedoms for personal pensions now make Defined Contribution (DC) pensions far more user-friendly than ever before’. This quote was taken in direct response to the question ‘Why are Defined Benefit Schemes (DB) winding up?’

Transfer value

Taking a transfer value reduces the employers DB Scheme liabilities, so therefore they may provide ‘enhanced’ transfer values to encourage leavers. If you are close to retirement age you are first in the queue to get paid, however if you are perhaps 20+ years from retirement age, will there be funds left to meet your employers covenant of a fixed pension amount for life?

Just ask employees in Waterford Crystal, Irish Independent, AIB, British Home Stores and many more, about what happens when the sponsoring company gets into financial difficulties. Defined Benefit schemes are struggling. They are underfunded, mainly due to the cost of an annuity of €10,000 pa for an employee,increasing by over 50% in the last 10 years from €166,000 to €253,000, at age 65*. (Source https://goo.gl/u91zVa) Hence, a requirement for employee, employer or combination of to increase contributions, or alternatively people at the back of the queue will be left with nothing.

 

Control

Control is the major reason many are taking a transfer value. Employees that have changed jobs, known as deferred members, can take control. Existing employees can also take control where the DB scheme is being wound up, and most likely being replaced by a DC scheme. Transfer values are based off bond yields, which are relatively attractive today.

 

Risks

Taking a transfer value means you can decide how your fund is to be invested. This can be good, or it can be bad. The investment fund can grow tax-free in a retirement bond or approved retirement fund (ARF). Risks include volatility of short-term performance, the risk of being too conservative, and the risk of living too long, and ‘running out’ of money.

Death Benefits

At present, members of a DB scheme pension the pension may die with you, or at best a spouse may get 50% of it. Taking a transfer value provides control and ownership. It also provides an Approved Retirement Fund option, which means that residual funds can be passed onto dependents, as opposed to the pension fund dying with you.

Access

Taking a transfer value means you can access funds, or ‘retire’ from age 50.

Chief Economics Editor of the Financial Times, Martin Wolf, has said ‘at current ultra-low interest rates, the transfer value of a DB pension has become significantly overvalued.’

Defined Benefit scheme pensioners in payment have preferred rights versus active and deferred members in a scheme wind-up (not a joke). Furthermore, a DB scheme is open to rule changes outside members control eg retirement age increase, or indexation being cancelled.

To say there is some injustice in this is an understatement, but the reality is if the company goes wallop or decides not to pump in the increased funds required to meet the covenant…

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