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Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE -

LEFT my former em­ployer two years ago af­ter work­ing there for al­most 20 years. I have an en­ti­tle­ment to a pen­sion from that com­pany’s de­fined ben­e­fit (DB) pen­sion scheme. I have re­ceived a let­ter from my former em­ployer, of­fer­ing me an ‘en­hanced trans­fer value’. Should I trans­fer my ben­e­fit en­ti­tle­ment out of that DB scheme. I have a de­fined con­tri­bu­tion (DC) scheme with my cur­rent em­ployer. What do I need to bear in mind when com­ing to a de­ci­sion? John, Carrick-on-shan­non, Co Leitrim THERE has been a big de­cline in the num­ber of de­fined ben­e­fit (DB) pen­sion schemes in re­cent years. For many schemes, a com­bi­na­tion of in­creased longevity, low in­ter­est rates and changes in ac­count­ing rules have re­sulted in scheme li­a­bil­i­ties out­weigh­ing as­sets — a fund­ing deficit, and an in­creas­ing cost bur­den on spon­sor­ing em­ploy­ers.

Many schemes are ei­ther clos­ing to new en­trants, clos­ing to fu­ture ben­e­fit ac­cru­als or wind­ing up al­to­gether. An added prob­lem for em­ploy­ers and trustees is that for many DB schemes, de­ferred mem­bers out­num­ber cur­rent ac­tive mem­bers. (De­ferred mem­bers are former em­ploy­ees who still have a ben­e­fit en­ti­tle­ment in the scheme and have not yet re­tired.)

In an at­tempt to ease the ad­min­is­tra­tive and fi­nan­cial headache as­so­ci­ated with these scheme mem­bers, many trustees and em­ploy­ers have con­tacted former em­ploy­ees and re­minded them of the op­tion they have to trans­fer out to al­ter­na­tive pen­sion ar­range­ments. Some­times a fi­nan­cial in­cen­tive to do so is of­fered.

There are a num­ber of things to con­sider when de­cid­ing whether or not to trans­fer out of your DB scheme.

The first and most im­por­tant fac­tor to un­der­stand is that if you trans­fer out of the DB scheme of your pre­vi­ous em­ployer, you will be trans­fer­ring your DB ben­e­fit into a DC ar­range­ment — ei­ther the DC scheme you have with your ex­ist­ing em­ployer, or a buy­out bond which you take out your­self. If trans­fer­ring to a DC scheme, the in­vest­ment risk in re­la­tion to the pen­sion fund passes from your former em­ployer to you per­son­ally.

On first im­pres­sions, a DB pen­sion scheme is the best type of pen­sion you can have — they’re often re­ferred to as ‘Rolls-royce’ pen­sions. A DB pen­sion prom­ises to pay you a pen­sion based on a per­cent­age of your fi­nal salary so plan­ning for the fu­ture is easy. How­ever, the abil­ity of a DB scheme to pay you a pen­sion based on your fi­nal salary de­pends on the scheme’s abil­ity to fund its pen­sion obli­ga­tions for all mem­bers go­ing for­ward. Ben­e­fits un­der DB schemes are not guar­an­teed. If a scheme’s as­sets are not suf­fi­cient to pay the ben­e­fits (li­a­bil­i­ties) and the em­ployer is not in a po­si­tion to meet the short­fall, the pen­sion promised to you may have to be re­duced.

There­fore the cur­rent fund­ing po­si­tion of the scheme is an im­por­tant con­sid­er­a­tion if you are of­fered a trans­fer value. If the scheme is not fully funded, this will be re­flected in the trans­fer value pro­vided to you.

That’s not to say that if a scheme is cur­rently in deficit, it will re­main so — or that an em­ployer com­pany will not be in a po­si­tion to elim­i­nate the deficit go­ing for­ward. The op­po­site is also true. A cur­rently fully funded scheme may not re­main so. Con­sid­er­a­tion there­fore needs to be given to the fi­nan­cial health of the scheme, and the fu­ture fi­nan­cial health of your former em­ployer — in so far as this can be de­ter­mined.

Some DB schemes of­fer en­hanced trans­fer val­ues — where you typ­i­cally get a bet­ter trans­fer value than a short­fall in a DB scheme would typ­i­cally al­low for — to try to en­cour­age ex­ist­ing mem­bers to leave the scheme.

If tak­ing any trans­fer value to a DC ar­range­ment, you would need to cal­cu­late the in­vest­ment growth which you would need on that trans­fer value to pro­vide you with the same — or a higher level of ben­e­fits — than the DB scheme was promis­ing to pay. The re­quired level of in­vest- ment growth (which you would need to give you equal or higher ben­e­fits than the DB scheme) may well be ac­com­pa­nied by a level of in­vest­ment risk which you are un­com­fort­able with. For this rea­son, many de­ferred mem­bers of DB schemes have in the past de­cided to re­main in the scheme.

How­ever, the fi­nan­cial pres­sures which many of the em­ploy­ers who pro­vide DB schemes are un­der have made peo­ple re­con­sider.

De­cid­ing on whether to take a trans­fer value from a DB pen­sion scheme is an im­por­tant de­ci­sion and it can­not be re­versed. It is im­por­tant that all of the op­tions avail­able are re­viewed and con­sid­ered care­fully.

If you stay in the DB scheme, the cur­rent fi­nan­cial health of the scheme may well im­prove or di­min­ish over time.

Trans­fer­ring out may well give you greater flex­i­bil­ity in terms of when and how to ac­cess your ben­e­fits, what the pen­sion in­vests in, how much in­come to take in re­tire­ment (you would no longer be limited to a spe­cific amount each year) and so on.

There are risks in­volved in stay­ing in the DB scheme — or in tak­ing the trans­fer value. How­ever an en­hanced trans­fer value does re­duce the Alan Casey is a pen­sions spe­cial­ist with Bank of Ire­land In­vest­ment Mar­kets While we will en­deav­our to place your ques­tions with the most ap­pro­pri­ate ex­pert for your query, this col­umn is not in­tended to re­place pro­fes­sional ad­vice.

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