Defined Benefit Pension Plan – Should I transfer out?
In last weeks blog I wrote about the proposed changes to the rules when defined pension schemes were being wound up. This week I want to talk about what you need to consider in deciding whether to transfer your benefits out of a defined benefit pension plan arrangement or stay.
A few years ago, no one would even dream of considering leaving a DB scheme. The benefits were guaranteed and no one ever questioned that they might not be paid. Things are very different now and anyone with retained benefits in a DB scheme needs to consider their situation.
What I will go through is the main pros and cons of staying in the DB arrangement and transferring out. But before I do so, I want to give an idea of how the transfer value is calculated. These are are laid out and agreed by The Society of Actuaries in Ireland.
There is a discount rate of 7% applied to your benefit. That means that for your transfer value to meet their valuation, your fund has to grow by 7% net EVERY year to retirement. That’s pretty difficult to do and would require a lot of risk and a bit of luck.
The post retirement discount rate is 4.5%. With annuities linked to long bonds, this is another tall order.
Inflation is calculated at 2%.
If the scheme is underfunded, your transfer value is reduced accordingly. It would be unfair for members to be able to take 100% of their transfer value, leaving the active members to fund an ever increasing deficit.
So, should you stay or should you go?
Stay in the defined benefit pension plan
You get a defined benefit pension, something that you will not be able to pay for out of the transfer value.
The employer still takes all the risks.
The employer pays for the costs of the scheme.
You preserved benefit is revalued ever year and increases by the lower of CPI and 4%
For both deferred members and pensioners, 50% of your pension is now protected. If they company cannot afford the guarantee, the government will pay for it from the pension levy.
Your pension is no longer protected in retirement. If the scheme gets in difficulty in the future, you may have your benefits reduced to provide benefits for deferred members.
The scheme continues in deficit and your transfer value is reduced further.
Go – take the money and put it in your own name
You are no longer exposed to the risk that they fund will be wound up.
In a defined contribution scheme, you get greater retirement options i.e. ARF’s, taxable cash. If you transfer the benefits to a Buy Out Bond, the ARF or taxable cash option is not yet available.
You have control over the investment strategy.
In a lot of cases, the transfer value will be reduced to reflect the fact that the scheme is in deficit.
If the scheme funding levels improve, you may potentially lose out on a higher future transfer value.
When it is in your own name, you meet the investment costs and risks.
There is a lot to weigh up before a decision is made, so make sure you make an informed decision. Ask the trustees for a copy of the latest annual and actuarial reports, the company funding proposal to make up the deficit and the latest member statement. As a member of the scheme, you are entitled to them.