"Gold-plated" DB pension - what a con

[YogaLite]

So not only transfer values have gone down, the companies now are allowed to stop them going through after shelling out for the unwanted advice!

Does anyone know how pension people calculate the annual pensions? Do they use gilt prices on a day they get around doing it? Or based on last month's gilt prices? Or some other tables?

I am still in a limbo, it took my old employer months to produce a statement, 3 months transfer quote expired whilst I was hunting for someone to do the "advice", now got rejected as TV dropped below £100k and they only accept over £100k so nothing will happen till next year or I waste hundreds on another quote.

What a con.

www.thisismoney.co.uk/money/pensions/article-11353005/How-savers-blocked-cashing-gold-plated-pensions.html

Transfer values went up when interest rates were low and annuity costs were sky high. If they are going down now that interest rates are going up then that is only to be expected.

It's not a con. It's like any other financial investment, and I'm surprised you wanted to transfer out before taking any advice.

This is the query I have:

Does anyone know how pension people calculate the annual pensions? Do they use gilt prices on a day they get around doing it? Or based on last month's gilt prices? Or some other tables?

Don't you mean to ask how they calculate the transfer value of a pension?

Because calculation of the annual pension entitlement varies from scheme to scheme, and you should know how your scheme calculates yours from the scheme literature.

Generally it's inadvisable to transfer out.

But if you do (after taking advice), gilt prices have made the transfer values go down.

It's not a con, it's just a bad time to be looking to transfer out.

Not sure you are looking at this the right way, DB pensions are based on ratio of final salary with the employer who provided it. A lot of providers want you to transfer out as it's cheaper than funding ongoing final salary pension plus any other benefits such as spouse pension.

However, it's usually better to leave a defined benefit pension with its' pension provider because you get a guaranteed income from them without the risk that comes from investment ie you will get the defined amount regardless of the ups and downs of the stock market.

Transferring out into a defined contribution pension, the funds may go up or they may go down, it's risky and it's all on you . You can spend thousands on advice (mine cost £3.5k) only for them to not recommend a transfer which is likely and most pension companies won't accept a transfer on that basis.

If the pension is defined benefits / final / average salary it's almost certain that transferring out will not be good value.

Even into another final salary scheme you're unlikely to get the equivalent amount in the new pension.

You lose out as the new scheme takes on additional risk (you might live a lot longer than average and cost them lots) so they take some of that risk cost from your transfer value

You need to be taking proper financial advice before transferring out of a DB scheme

Just stay in the scheme and stop worrying about the transfer value or how it is calculated.

DB pensions are not a con, the benefits are extensive, you have a guaranteed pension for life, usually with index linking and death benefits. That’s why they’re considered ‘gold plated’ and it’s extremely unlikely to be wise to transfer out of the scheme.

@DadDadDad might be able to add something to this discussion (or might not).

It depends on the pension scheme, but when I used to work for a DB pension scheme they would calculate how much it would cost them to provide you with a pension at as a certain date and then, using factors uploaded from the actuaries based on the month before would calculate the value of the pension. That transfer value would then be guaranteed for 3 months.

Whether or not it's a good idea to transfer depends on the type of scheme you are transferring to. Usually you wouldn't want to transfer out of a DB scheme unless it's to another similar scheme.

I've been @ - summoned! I'm an actuary but pension scheme transfer values are a technical area that are not in my field, although I'm aware of the main principles.

I guess we would expect a TV to reflect two amounts: what it would be expected to cost the pension scheme to provide your retirement benefits; what it should cost the transferring member to set up their own assets to provide their retirement benefits. These two figures will probably not be the same, and some poor actuary (yes, have pity) has to come up with a suitable calculation methodology for TVs that is fair to the employer and to the employee.

You would expect TVs to come down in value as gilt / bond yields go up (as they have been all year and accelerated recently), because you need to buy fewer assets (bonds - whether issued by government or companies) to generate the same return. However, @scrivette's reply points to a potential issue - a lag in the basis of calculation - so if the yields being used in the calculation are higher than current yields, the TV might look lower than you really want.

But the big concept we haven't mentioned is risk : if you stay in a DB scheme, the scheme carries all the investment and longevity risk - if the stockmarket falls, or yields fall (and you haven't matched assets to the liabilities) or inflation rises, or if members live longer than the scheme actuaries predicted (they try, but it's hard to get it right for the next 20, 30, 40 years), the employer ultimately bears the cost (with the insurance of the PPF if they go bust).

If you transfer out, then you are taking the risk on yourself (up to the point you choose to buy an annuity which transfers the risk to an insurer, but that could me many years in the future and will reflect the "price" of the risk when you retire, not its price now).

Problem is that "for life" becomes quite meaningless when u realise no one can guarantee how long u live - especially when u hear of people dying even before retirement age.

I wouldn't have a problem had I not been made waiting for weeks/months at each stage. I don't have a problem with investment risks, but more that it will all be lost if I drop dead before getting any of it for me or my family.

out of interest - why do you want to transfer it out? Where are you transferring it to?

Well, of course some people live longer than others, some will receive their pension for 1 year, others 50, same with the state pension. The fact that as long as you are lucky enough to be alive you will continue to be paid and will never run out of money in your pension pot is not a con.
None of this changes the perspective that it is very unlikely to be advisable to transfer out and forgetting about the TV and its fluctuations is recommended.

And, depending on the terms of the scheme, it generally won’t be lost if you die before getting it, there is usually a widows or dependents pension. Yes, not the whole amount but means that is not a good reason to sacrifice the perks of the DB.

@Cavviesarethebest, because i want to leave a provision for my disabled dc after I have taken the lump sum.
The co I was talking to will now not accept me as the fund is below £100k.
They would only use the funds they run and I can't go to anyone else. Mind u, most don't accept below £250k so very few options left.

I am absolutely disgusted because it's taken over a year and I am no further with it.

Have you made an official complaint - you can then take to the financial ombudsman

No, I don't have energy to fight anymore. I tried my MP and was told to stick to the process.

So effectively instead of accepting the risk, I am close to accepting that most of it will be lost.

Well - up to you - but you could just put in a very simple email saying briefly what the problem is and ask for it to be treated as a formal complaint. They will then have to do the work to investigate and respond to you.

Oh, was also told that advisors can pick and choose who they accept so it's now really a wild goose chase.

What scheme are you in?

I am a pensions actuary. Transfer terms are set by the scheme actuary, most often, but not always, using gilt yields on a specified day of the previous month.

Honestly unless you have significant debts you need to pay off or are in very poor health without a spouse/dependent, taking a transfer value is likely to be a very bad decision. The average 60 year old woman will live for another 28 years. You obviously need to take your own advice, but I would love to have a DB pension and if I had one there are almost no circumstances where I would take a transfer value- they are absolutely not a con

@Dacquoise, I would be interested to hear who u used and whether u actually got your transfer done, all quotes I have seen were about double of yours.

Also, whether your transfer was over £100k/£250k? Did they invest it in their own schemes or were u allowed to suggest where u wanted it to go.

Would u be able to PM me please?

@YellowMeeple, thank u, but believe u me, world looks different when u see people dropping dead before their average 28 years past 60 is up and losing most of it.

That’s the problem, it’s an average, for everyone who dies very early there is someone else getting their birthday card from the King. Every scheme I have ever seen though has a ‘5 year guarantee’ so if you die during the first 5 years your dependents get the balance of the first 5 years pension payments. Most also have a death in deferment benefit too, so it’s almost impossible to get nothing. Inflation protection is also particularly valuable at the moment too