Shoiuld I switch funds to public pension?

[keepon]

I have a big decision to make on my somewhat messy pension situation. I have a significant amount invested over 16 years in a private defined benefit fund. I have a recently-started public service pension in which I will be well short of full service, so buying back years is an option.
I have read that buying years is not that advantageous, since it seems the price is prohibitive, though I have also read that I may be able to get a better deal due to earlier contract work.
On the other side, my former employer is, in my view, taking advantage of the current climate around pensions to send out warning signals on the health of the scheme (and has barred access to new entrants). I do not have any faith in the long-term health of the scheme, or in my former employer's trustworthiness, or in the ability of any private sector regulator to influence events.
I am very close to jumping ship. So, some questions:
a) will I pay penalties?
b) am I crazy getting out when markets are so low?
c) who should I go to for advice? My current employer is vague and passive on this, to say the least. And it seems to me that this is an incredibly complex area but that equally it is very difficult to get an independent take on one's individual situation.

 

[StevieC]

Hi Keepon

If you transfer the defined benefit pension, you will get a transfer value for its current worth. Its unlikely that this transfer value will be anything near what you would need to purchase the same benefits at retirement.

As its a defined benefit pension, you are not affected by the markets so much as you are entitled to n/60ths at retirement regardless of the cost of the pension. The employer makes up the shortfall.

In my opinion the key questions you need to ask yourself are;

1) How many years you have to go to retirement? If its not that long then take the deferred pension conditional on my next point.
2) Will the company still be around when you retire? This is the most important question you need to ask yourself. If the company goes bust before you retire and there is a shortfall of assets in the pension fund to meet its liabilities then you have no recourse and have to accept whatever portion of the pie left for you, even if its less than you expected.
3) Most companies have stopped new entrants to defined benefit schemes, BOI, AIB etc. Companies you would consider could never go bust have put there new entrants into defined contribution schemes a few years ago, long before current problems. Dont let this fact be a major consideration for you, if anything it shows your past employer has a handle on the liabilities they face.

Bottom line in my opinion is if you feel the company will still be around when you come to retire, then leave the defined benefit pension where it is. If you dont think it will or are unwilling to take the risk, then take a transfer value.

Hope this helps.

 

[North Star]

Hi Keepon:
I agree with StevieC's recommendations, subject to solvency a defined benefit pension is still the gold standard in pensions. A couple of other points which may help you in your decision.

1) If it is possible to find out what the current defecit is in your previous employers DB scheme, it may give you a sense of what the shortfall could be if the scheme were to be wound up. This is not scientific, but may give a better sense of the risk
2) Dont be too quick to rule out buying back years if that option is open to you. Have a thorough look at the cost benefits

 

[keepon]

Many thanks for those response SC and NS. They do help clarify things. It seems that I do need to take a look at the security of the private scheme.

Here's a general, but related, question: if the employer is putting people on short-term contracts (which is happening in my old job) and also are closing access to new employees, even if the business remains profitable, how is the defined benefit scheme going to survive long term?

 

[StevieC]

Short answer. It wont.

Long answer. As the existing members of the scheme retire/transfer out, the liabilities of the scheme will decrease over time until there is no one left at which point all employee's will be a part of a defined contribution or group PRSA arrangement.

Defined benefit schemes are expensive for employers and hold the added burden of now having to show their liabilities on the company balance sheet.

These defined benefit pensions will simply not last in the private sector hence why I recommended you remain in the scheme if you are comfortable with doing that.