RETIREMENT BENEFIT OPTIONS
Defined Benefit Scheme Preserved Benefits
If you’re a member of an occupational pension scheme and leaving service, the Pensions Act provides that trustees of that scheme must provide certain information to you within 2 months of leaving service, including:
1. The rights and options available,
2. The preserved benefit, if any,
3. Transfer value rights, if there is a preserved benefit, and
4. How to exercise the rights and options open to you.
Before you leave service/ occupational pension scheme, it is vital that this information be obtained and analysed before making any irrevocable decision with regard to the options open to you.
At SMP Financial, we can evaluate this information on your behalf and take you through the pro’s and con’s before any decision is made.
Simply leaving YOUR pension as is, comes with risks -
Risks in maintaining the preserved benefit in the scheme
Traditionally leaving a preserved benefit in a defined benefit scheme was seen as the best option for most individuals involved because:
They are now not directly exposed to investment or longevity risks in relation to their deferred benefit; such risks would then fall on the employer.
If the preserved benefit is maintained in the scheme, it may benefit from any future discretionary scheme benefit enhancements (subject to scheme rules) and/ or discretionary pension increases.
However, there are certain risks to the individual in maintaining a preserved benefit in the scheme:
There is a risk that the scheme could wind up in the future with reduced or no benefit for members.
Many defined benefit schemes do not currently meet the Pensions Act funding standard (i.e. 7 in 10). If a scheme were to be wound up when underfunded, members with deferred benefits at that stage would not receive their full benefit entitlement; indeed in certain significantly underfunded schemes, no benefit might be provided at all for deferred members on scheme wind up, as pensioners take priority over deferred members on scheme wind up.
Of course when an individual reaches retirement age in the scheme, they will have priority over other deferred members. However, there is no guarantee when a scheme winds up that there will be enough even for retirees at that stage.
Where the scheme is currently underfunded and has a deficit, there is a risk that the deficit (and hence risk of reduced or no benefits on scheme wind up) could increase in the future due to a combination of a number of circumstances:
The employer might not make the level of contributions required to restore the funding of the scheme to 100%. The profitability of the employer might deteriorate to such an extent that it may not be willing or able to continue contributing to the scheme at the level required to fully fund promised benefits.
The scheme’s future investment returns could turn out to be lower than anticipated, and/ or other relevant assumptions (e.g. longevity) are not borne out in practice. Hence this could cause the current deficit to rise further.
The transfer value payable later on could be lower than the value on offer today. From time to time, DB schemes may offer an Enhanced Transfer Value (ETV), it is essential that you consider this option carefully and take professional advice.
As mentioned, many defined benefit schemes do not currently meet the Pensions Act funding standard. Transfer values from such schemes are usually reduced by the trustees to reflect the degree of underfunding in the scheme at that time.
If the individual maintains the preserved benefit in the scheme for the time being, there is a risk that the transfer value payable from the scheme at a later date, if you opt to take a transfer, could be lower than the value on offer at the date of leaving service for two reasons:
Some employers, as part of a redundancy deal may offer enhanced transfer values to departing employees, if they opt to take the transfer value within a short specified period, e.g. 30 days, of leaving service. In effect the employer will undertake not to apply a reduction (or the full reduction) in the transfer value to reflect the scheme’s current underfunded position, if the transfer value is taken then.
E.g. the full transfer value may be €100,000, but the scheme is underfunded by 20%. The individual may be offered a transfer value of €100,000 if they take the transfer value within 30 days of leaving service. After the expiry of the 30 day period, the transfer value on offer will reduce to €80,000.
The funding position of the scheme could deteriorate, and so higher reduction might be applied to future transfer values, than applies today.
There is a risk that benefit levels (including deferred member’s benefits) could be reduced in the future, either by the trustees applying to the Pensions Board or compulsorily by the Pensions Board, in order to reduce or eliminate a scheme deficit.
Even where the scheme is currently funded, there is a risk that the scheme could go into deficit in the future.
Leaving your preserved benefit in a defined benefit scheme, you are exposed to the scheme funding risk which could lead to a reduced or, in extreme cases, no benefit payable at retirement, compared with the promised level of deferred benefit.
In deciding whether to maintain your preserved benefit in a defined benefit scheme, SMP Financial will conduct an assessment on your behalf in two key areas:
The current and anticipated funding strength of the scheme. We will request the latest Annual report from the trustees, including the latest Actuarial Valuation Report.
The value of the employer’s financial commitment (aka employers covenant) to the scheme; if the scheme gets into serious deficit, will the employer be willing or able to make the financial commitment to make up the deficit. If the employer is in poor financial health itself, then the value of the employer’s future commitment to the scheme may be questionable.