One of the hardest things to advise on is when someone asks if they should transfer out of their defined benefit scheme to a plan in their own name or to a new employer’s defined contribution scheme. There are so many unknowns about future funding levels that there is always going to be an element of guesswork involved. It is certainly a big change from the “gold plated” pensions that they people thought they were in the past.
An article in The Irish Times last week showed how underfunded the Irish defined benefit pension schemes really are. The deficit of the top 20 defined benefit pension schemes increased from €3 billion at the start of the year to €5.7 billion at the end of July. That’s a 97% increase in just 7 months.
When we look a bit deeper, we see that there are 666 defined benefits pension schemes still in place in Ireland, of which 503 are still active, the others are frozen. Of all those schemes, 30% do not meet the minimum funding standard. The problem is, the minimum funding standard is set so low, that even if the defined benefit scheme meets this funding standard, it will not be able to pay the cost of all the benefits under the scheme.
Then we look at who these schemes are providing benefits for. 78% of all defined benefit scheme liabilities are for former employees. If we apply that to the deficit in The Irish Times, €4.4 billion of the €5.7 billion deficit is for people who have retired or have left the company! Will companies have the desire to continue to pump that amount of money into providing benefits for someone who no longer provides a benefit to the company?
This makes it look like a no-brainer to take your money out of the defined benefit scheme. The sticking point is when you look at how the transfer value is calculated. The scheme actuary uses agreed assumptions in calculating what transfer value is required to replicate the benefit that you is provided under the defined benefit scheme. The key assumptions are:
With these assumptions, it is almost impossible to match the benefits being offered under a fully funded defined benefit scheme. But will the scheme ever be fully funded? And with the ARF option now available to those who transfer out of defined benefit schemes, the answer on whether to stay or go is beginning to tilt to one side.
What do you think about the future of defined benefit pension schemes? Would you prefer to take a chance on being paid all your benefits in retirement or take a transfer value now but know that you are safe if the scheme winds-up? You can contact me directly at email@example.com