DB closing and employee moving to DC scheme

[Ravima]

John has a DB pension with his employer and has 27 years service. Employer currently contributes 20% salary to the DB scheme.

Employer now shutting down DB scheme and employees are moving to DC scheme. The benefits to date in DB scheme remain.

John must now take the risk for the next 13 years, rather than the employer.

Employer is prepared to continue with 20% contribution to DC.

Should John get something extra from employer for removing this risk from employer and shouldering it himself?

If so, what?

 

[Conan]

Ravima,
Logically you are correct. In a DB scheme the Employer effectively signed a "blank cheque" in that they promise a specific benefit ( a future pension of a fraction of a future salary). Therefore the Employer carries the investment risk.
The reason they want to get out from under this obligation/risk is that it is difficult to quantify the potential liability.
By moving to a DC structure (even if they contribute the same amount of money as currently) they can at least avoid the upside risk ( of having to increase future contributions). From an accounting point of view they no longer have a potentially open liability.
By moving to a DC structure the investment risk is transferred to the members. Some members mave fare better (depending on their investment decisions/ outcomes) and some may fare worse. But the Employer has at least capped their future liability.

 

[rob oyle]

FYI: 20% is the highest rate I've ever heard of for a DC scheme - typically a high single-digit percentage rate is paid by the employer with perhaps some matching of the employee's contribution. It could be that because the employee is well advanced in his working career that this high percentage is paid.

 

[Steven Barrett]

If the employer is contributing 20% to the DB scheme and is shutting it down, 20% isn't enough to provide the benefits for the members so John would want to look at the solvency levels of the scheme.

20% is an extremely generous contribution to the DC scheme. John has to consider the costs of running the company. If they are going to contribute more to the pension scheme, money has to be taken from somewhere else. Where is that somewhere else? Will it be his salary or will his colleague be made redundant so others can have a higher pension contribution?

John can also look at it that as it has moved to a DC arrangement, at least he is certain that those benefits will be paid and he won't end up getting a fraction of what he accumulated.

Steven
www.bluewaterfp.ie

 

[JoeRoberts]

From your post it appears the scheme will be frozen, not wound up as you say the benefits in the DB will remain. And you don't mention a transfer value. So there will be a deferred pension payable at 65. Unless they are buying deferred annuities then there is a risk that the fund will not be able to pay that out. So John should find more details from the Trustees about the funding position.

There is the risk that the new contribution rate will not buy the difference between the expected pension at 65 and the deferred pension at 65. Having said that, 20% is a very good deal and will likely be 20% of full salary, not pensionable salary ( salary less the integration with state pension). If John had a salary of say 40k with a 40/60 integrated pension then his pension at 65 would be 14.6k/yr with full service. Now it will be 9.9k if all goes well. So 5k down which would cost about 125k to buy. But employer will be giving 8k per year for 13 yrs so even without growth that would be 104k. All very simple figures and ignoring inflation/salary increases etc but I think it shows the key point to look at is how secure the deferred pension is.

If scheme was actually being wound up then I see that the Trustees would be obliged to look to follow the example set by the Trustees in the recent Omega Pharma case whereby they secured a much enhanced transfer value from the scheme for deferred members by putting a demand on the employers for a lower discount rate. Much would depend on the wording of the Deed.

John may also check to ensure that other common benefits within many DB scheme will also be in the DC arrangement, e.g. death in service, spouse's pension, long term illness.