DB Pension Current Val Vs Annuity from Lump Sum

[QQQ]

A previous occupational pension scheme I had is being wound up by the trustees. I have been informed of the current value and my options. I have a query over the computation of the current value and also on the options available.



It is a Defined Benefit pension that peaks at 40/60s of final year salary. From this figure 1.5 times the state pension is deducted and then this becomes my annuity. My final salary was €51k (inclusive of bonuses and less pension contributions made by the company) and I have 9.4 years pensionable service. I am 36 and married with children and I would like my pension fund to be available to my family after I die.



Q1:

Should ("current value" of pension * open market rate of 6%) = (average salary during my last year employed with the company * pensionable service / 60)?



or in more detail ... my "current value" is €34k according to the agents for the trustees. I was told by a non-actuary in a pension company that a value of €34k would yield approx €2k annuity per year (i.e. the open market rate of 6% multiplied by the "current value"), whereas under the scheme that is being wound up I would have €51k * (9.4 / 60) = €8k (i.e. final year salary * pensionable service / 60) of an annual annuity ... this is 4 times higher than the €2k annuity derived from the "current value" indicated to me. Why the DISCREPANCY? I am querying this with the trustees but the agent wants to discharge his and the trustees' responisibilities to the pension this week and time is of the essence.



Q2:

given that I hope to be going back to work within 3 months and that my employer is likely to have an occupational scheme would you recommend a Buy Out Bond (personal pension bond) or a PRSA? My current intention is to put it in a Buy Out Bond, make no further payments into it and IF allowed by the actuaries in my new occupational pension scheme transfer it into that scheme at low or no cost.



QQQ

 

[QQQ]

ollyk1, I understand your rationale, but I thought that the scheme allowed members to get a pro-rated portion of their likely salary (determined by compounding salary at time of leaving by published consumer price index) at retirement not at point of leaving the company (via redundancy). Is it more common for it to be the way you suggested?

A PRSA is also option to me in addition to the Personal Retirment Bond. Would you hazard a guess as to whether I would be allowed transfer €34k out of a PRB and into a future occupational scheme?

Thanks again!

 

[QQQ]

In your calculation for value i.e.

"Pension at normal retirement date (€8k) * Expected revaluation to retirement (2.5%p.a. say) * Discount for expected investment return to retirement (7%p.a. say) * Annuity factor (this is a big variable and would depend on whether pension increases in payment etc.) = value"

the only thing that I don't understand is "Discount for expected investment return to retirement". Why is this needed i.e. if the expected revaluation until retirment is 2.5% why would you discount it by an expected investment return to retirement (it seems to be saying that the CPI is anticiapated to be 2.5% p.a. and the fund is axpected to grow at 7% so therefore the fund's value should be reduced by this expected fund's growth!!)? Why do you call this a discount i.e. is it likely to be a multiplier less than 1? Are you saying that if it is 7% p.a. that this multiplier will be approx 0.16 i.e. 1/(1 + 0.07)^27 where 27 is my number of years to retirement.

The latest information I have is that the actuary who arrived at my "current value" seemed to take an expected fund growth of approx 5.25%, over 27 years which amounts to a compound multiple of 4 and then use another multiple of approx 0.25 which in effect cancelled out the two multiples. It all seems a little unfair from my perspective.

BTW, I have been made redundant and the shceme is being wound up.

Thanks for the help.

QQQ

 

[Azriel]

Where the Scheme is being wound up, the assets will be compared with the liabilities and the Scheme Actuary will decide whether there are sufficient funds to meet all of the liabilities. In this case there is nothing to suggest that the assets are not sufficient.

The minimum amounts payable to individual members are prescribed, ie the basis for calculating these is set by the guidance issued by the Society of Actuaries in Ireland. For pensioners, an annuity needs to be purchased.

For non-pensioners, the assumptions are that the deferred benefit will increase by 2.5% pa and that investment returns of 7% will be acheived. There is also a Market Value Adjustment (MVA) applied to reflect the fact that 7% is above what is reasonable based on current market conditions. There is a (relatively weak) allowance for mortality post-retirement. This basis for calculating the annuity rate is (c. 25-40%) weaker than that assumed by Insurance Companies (who sell pensions).

As such pensioners do fine (a pension is purchased) but non-pensioners can get a fairly low value versus what it will cost to secure the pension in the open-market.

The guidance note is being updated to partially improve the situation for those at older ages (closer to retirement) but to reduce values payable to those with significant periods to run to retirement.

Two comments that I would make:-
- you may be getting the minimum value (the guidance prescribes the minimum basis)
- if the Scheme is being would up, is there any surplus (ie assets > liabilities) and how is the surplus being distributed (are members getting any)? (the converse also applies - Scheme assets may only be sufficient to secure the minimum benefits)

One thought - rather than speak to the Company, can you take your points up with the Trustees?