Retirees from Defined Contribution Plans

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Conan

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The Minister for Finance has announced today that he will provide an option for members of DC pension schemes who retire during the next two years to defer having to purchase an annuity.
Under the deferral arrangement, members who retire between 4th Dec 2008 and 31st Dec 2010 will have the following options:
  • Take the normal tax-free lump sum and invest the balance to buy an annuity, or
  • Take the normal tax-free lump sum and defer purchasing an annuity up to 31st Dec 2010 (subject to Trustee approval)
Clearly this flexibility will assist those who are obliged to buy an annuity on retirement (where the ARF facility is not an option) in the light of current depressed markets.

Whilst the option to defer is positive, and deferring the purchase of an annuity will (in the normal course ) result in a slightly higher annuity rate at an older age, the other side of the equation is that falling interest rates will tend to reduce annuity rates generally.

On balance, the increased flexibility (at least for the next 2 years) is welcome.
 
Hi Conan,

Do you have any advice for people on defined benefit schemes who are retiring in the next year. Should they be seeking possibly written reassurance from their employers?
 
I assume reassurance that the Company will be able to pay the pension in light of all the recent scary stories
 
There are two forms of scary stories doing the rounds at present, regarding pension schemes: -

(1) I'm in a Defined Contribution scheme and the value of my fund has dropped by 30% in the past year.

Such schemes are invested by a third party and the employer can give no reassurance as to what the value will be in the future.

(2) I'm in a Defined Benefit scheme and the scheme has lost a lot of money and my employer may not be able to make up the difference.

Not sure how an employer can give written reassurance that they will have enough money themselves to provide an unknown level of funding in the future. Can any private sector employer give a written guarantee that they will still be in business in the future?
 
In the case of DB Schemes, the pension is a "promise", subject to:
  • The pension Fund remaining solvent, and
  • The Employer remaining in business and continuing to fund the Scheme
There is an article in today's Business section of the IT on this issue.
If you are a member of a DB scheme then you should be able to get a copy of the most recent Actuarial Report which will state the solvency level. Though if it was prepared say 12 months ago, it will not reflect the current state of the Fund.
Bear in mind, that under current rules, if a Fund is closed down, that existing pensioners are first in the queue to be secured, followed by existing members and deferred pensioners.
For DB members retiring in the next year, there is not a lot you can do. Information on the fund solvency and the solvency of the Employer is the only reassurance. You could always seek to "retire early" (subject to Employer approval) and at least then you are in the more secure "pensioner" group. But ultimately it is down to the two requirements mentioned above.
 
I have just had my pension, a DB scheme converted to an annuity last Aug. What does this mean for me? It is supposed to be guaranteed for life. If the company folds up what happens to my pension?
I thought the government guaranteed pensions after PMPA went bankrupt in th 80s when thousand lost their pensions.
 
The issues in the news at present relate to DB schemes where the pensions are paid directly out of the scheme assets. Your is different in that the scheme bought an annuity for you, so your only worry is if the annuity provider company goes bust, rather than just the DB scheme.

Presumably your annuity is with one of the "High Street" Irish pension companies, e.g. Irish Life, New Ireland etc? In the event that one of these went bust, the most likely scenario is that another company would buy it out and would therefore have an obligation to continue paying your annuity.
 
Thanks. I am with New Ireland, but it's not a great encouragement for people to pay into a scheme for most of their life to find they can loose it.
Should the government not guarantee these the same as the banks?
 
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