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 follow a low-risk strategy you may see a lower level of income, that can be supported over your lifetime, than a DB scheme,” says Rockett, adding that it’s a “trade-off” between a search for security and growth.
If you have . . . more than two years to go While retirement may be a distant possibility for you, it doesn’t absolve you from potentially making some difficult decisions.
“There is a cohort of people – and these are the same people who have significant mortgages and young families – who are most at risk,” says Tuohy. “If they really understood that there are significant risks in a DB scheme, and that they are well back in the queue towards retirement, they simply wouldn’t be there.”
In such cases, he advises people to ring-fence what they have in their pension schemes.
“It’s the bird-in-the-hand or two-in-the-bush argument,” says Tuohy, noting that if you think there will be enough left in the pot to pay you a pension at the age of 65, you may be better off staying in the scheme. On the other hand, depending on your age, that leaves a lot of time for something to go wrong with the pension scheme.
“If a company is willing to put in extra money, put it into an individual pension,” says Tuohy, although he notes that defined contribution (DC) schemes should be “significantly over-hauled in the interest of members”.
Rockett, on the other hand, suggests that scheme members in underfunded DB schemes with some time left until retirement should typically remain within the DB scheme, even though it may be underfunded and may be wound up in the future.
The key reason for doing so, she says, is that a transfer value may be higher in the future.
“A transfer value is calculated based on prescribed assumptions which effectively discounts your future payments to a present-day lump sum.
“The discount rate used to determine the transfer value is 7 per cent. Therefore, each year – even if the funding position of the scheme does not improve – the transfer value would increase by 7 per cent,” she says.
So, even for underfunded schemes, she says that there is a likelihood that between additional contributions and/or positive investment performance, the funding position of the scheme will increase from here and the reduction to the transfer value would be less at some later date.
“You can build a retirement plan around the portion of the DB scheme getting paid, and you can look to fund the balance through AVCs and something else,” she suggests.
After all, AVCs – even those that are made to DB schemes – are generally fully protected, even if the main DB scheme is underfunded.