Client questions

Statistics from the Pension Protection Fund (PPF) website show that the aggregate funding position (total assets minus total liabilities) of around 7,400 Defined Benefit funds is estimated to be a deficit of £188.5 billion at end-April 2009. This is a staggering figure. The total deficit of schemes in deficit in April 2009 is estimated to be £204.8 billion whereas total surpluses of schemes in surplus rose to ‘just’ £16.4 billion. With these sorts of figures, it is no surprise that people are worried about the security of their final salary pensions.

Scheme members – and here we are primarily talking about “deferred” members rather than those who are still working for the company and are “active” members of the scheme have the following options:

• Do nothing
• Take early retirement through the scheme – if over 50
• Transfer to another pension scheme
• Transfer and draw a pension via an insurance company – if over 50

Whether to transfer or not is a hugely complicated decision and certainly one that should not be taken lightly. The following is just a snapshot of some of the considerations.

You should request an update from the scheme administrators. This should include a transfer value quotation, a summary of the predicted pension at normal retirement age and upon early retirement if applicable. In addition, it should clarify the position with regard to a spouse’s or civil partner’s pension and also to what extent your pension would increase in payment.

If you do nothing and the scheme remains solvent throughout your and your spouse’s lifetime, and you live a long time, this will probably have been the best option on a risk adjusted basis. Final salary schemes are often very generous when compared to what sort of annuity you could buy from an insurance company if your transferred the fund there. If you transferred to a personal pension, you could do better if the investments performed well but there is no guarantee to that.

If you are worried about the long term viability of the scheme, you could always take the maximum tax-free cash lump sum at retirement to reduce your exposure to the scheme, even though it might not represent good value for money on paper.

If you take early retirement you can draw this tax free lump sum early which is an advantage but other than that, the scheme still needs to remain solvent to pay you your income and if it does get into trouble and has to fall back on the PPF, it is only people past their normal retirement age who get superior protection.

If you transfer to another scheme you should obtain a Transfer Value Analysis (TVAS) report that will show the investment return that you will need to generate in order to match the pension that you will be foregoing. Irrespective of your concerns about the financial stability of the scheme it will be a good indication of how generous (or not) the transfer value being quoted to you is.

Additionally, you will be moving from an environment where you are taking no investment risk into one where you are. Therefore you should probably stagger your investments rather than invest the full transfer value into “the markets” in one go.

If you draw a pension from an insurance company, you need to make sure that you are comparing like for like on things like indexation in payment and spouse’s pensions.

We would recommend that anyone who is concerned about this should have a look at the Pension Protection Fund website as this explains what benefits would be payable. You should note that compensation is capped and indexation of benefits may be much lower than via the main scheme.

Evolve - December 2009