DB pension schemes: should you stay or should you go?
The future for defined benefit pension schemes is looking bleak. What are the options to make your situation more secure?
If you have been listening to the discussions about the future prospects of defined benefit (DB) pension schemes, you might have wondered what it means for you.
In the past, someone in a DB scheme would have been in a privileged position, with a guaranteed income on retirement based on their final salary.
Now this guarantee looks anything but secure, leaving many to wonder just what they will be entitled to when they hang up their briefcase for the last time.
“It’s fair to say, at a very general level, that the future for DB schemes is very bleak. In future there will be one of two outcomes: benefits will be reduced or the scheme will be wound up,” says Sandra Rockett of Davy Private Clients pension advisory service.
So what does this mean for you? If you are in a DB scheme and are starting to get scared about its prospects on retirement, how do you decide whether to stay or go?
If you have . . .
If you are receiving a pension based on your final salary, you are in an enviable position.
“The reality is that if the scheme is fairly well funded, you have the extra layer of protection from other members’ assets,” says John Tuohy, chief executive of Acuvest.
However, while contributions from employed members of the scheme might be propping up your income in retirement, this does not mean that it is entirely safe, as retired members of Independent News & Media recently discovered when the group proposed a 46 per cent cut in pension benefits.
That may be an extreme case, but with pension schemes battling to survive, benefits such as inflation-matching are regularly being cut. Not only that but, up until recently, anyone who had already taken their pension could be reasonably confident that their benefits would be secured in the event of the scheme being wound up.
Now, however, the Government has made moves to change the preferential order in the event of a wind-up, so that retired members don’t receive preferential treatment at the expense of members who are still working.
“That could be a very significant factor that’s playing on many people’s minds,” says Rockett.
But while the move was recommended in a recent OECD (Organisation for Economic Co-operation and Development) report, the legislation has been deferred yet again.
“First of all, it was stated twice by the Minister that it’s going to happen but it hasn’t happened. So whether there will be political will or not to introduce it in the future remains to be seen,” says Tuohy, adding that it may be seen to be unfair to members who have already retired.
“If you or I were receiving a pension already, would we be arguing that it was encroaching on our rights, by making a change after the event?”
What is clear is that, if it was to happen the way it has been mooted, it would significantly affect pensions, with Tuohy noting that it would “undoubtedly reduce the value of the benefit of a pension”.