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 are . . . within two years of retiring
If you fit into this bracket, then it might be time to pack up your pension bag and get the hell out of Dodge. It might go against everything you have so far believed, but some pension experts advise that it could be the right option.
Indeed, Rockett has encountered many senior executives who are actively taking this option by voluntarily exiting their pension scheme.
“Anyone approaching retirement should be actively considering this. There is now an understanding that a DB scheme isn’t as guaranteed as we were once led to believe,” she says. “I think that the number of people actively considering it has increased significantly.”
For Rockett, there are two key points to consider:
The likely level of income payable from the DB scheme.
The security of benefits in the event of a scheme wind-up.
“The key reason to stay within a DB scheme is because your transfer value is so heavily reduced” if you were to cash out now, says Rockett. But, if you’re close to retirement, your employer will appreciate that their liability is going to increase significantly if you stay within the scheme.
“Companies are in a position to negotiate with people to give full transfer value,” says Rockett, adding that a key reason for them to do that is because they will be effectively discharging your pension liability and getting it off their balance sheet.
For Tuohy, the decision is not as straightforward. “It’s really, really difficult if you’re a couple of years from retirement. People are hoping that they fall over the line,” he says, noting that once you become a pensioner, under the current system, you move to the top of the queue and become a secured creditor in the event of a wind-up, although, as noted previously, this may change.
“It’s a very big incentive to try and hold on,” he says, but adds that there is a flip-side, which echoes Rockett’s argument.
“Look at the example of Waterford Crystal – you can wind up with very little left, even though you might be just one day away from retirement.”
So, if you want to take control of your income in retirement, an option might be to negotiate with your pension-fund trustees for a decent transfer value and move your money into an Approved Retirement Fund (ARF) once you retire.
Of course taking responsibility for your own pension brings its risks. “You’re transferring responsibility for the investment of the pension fund from the trustees to yourself. Decisions that are made on the ARF are very much the responsibility of the individual,” says Rockett, adding that if you want your new fund to provide the same benefits as the DB scheme, you would typically need to generate a 4.5 per cent return net of fees and charges.
It’s not an insignificant figure and may prove difficult to achieve, particularly if you don’t take on some risk.