Baroness Ros Altmann, a former UK Pensions Minister is of the opinion that ‘the cash equivalent transfer values are so attractive and the freedoms for personal pensions now make Defined Contribution (DC) pensions far more user-friendly than ever before’. This quote was taken in direct response to the question ‘Why are Defined Benefit Schemes (DB) winding up?’

Transfer value

Taking a transfer value reduces the employers DB Scheme liabilities, so therefore they may provide ‘enhanced’ transfer values to encourage leavers. If you’re close to retirement, you’re first in line to get paid. But if you’re 20+ years away, you might face a risk that your employer won’t have enough funds to meet the fixed pension amount for life.

Just ask employees in Waterford Crystal, Irish Independent, AIB, British Home Stores and many more, about what happens when the sponsoring company gets into financial difficulties. Defined Benefit schemes are struggling. The schemes lack funds mainly because the cost of a €10,000 annual annuity for an employee rose over 50% in the last 10 years, from €166,000 to €253,000 at age 65. This forces employees, employers, or both to increase contributions; otherwise, people at the back of the queue risk losing out.

Control

Control is the major reason many are taking a transfer value. Employees that have changed jobs, known as deferred members, can take control. Existing employees can also take control when the DB scheme winds up and the company replaces it with a DC scheme. Transfer values are based off bond yields, which are relatively attractive today.

Risks

By taking a transfer value, you decide how to invest your fund. This can be good, or it can be bad. The investment fund can grow tax-free in a retirement bond or approved retirement fund (ARF). Risks include volatility of short-term performance, the risk of being too conservative, and the risk of living too long, and ‘running out’ of money.

Death Benefits

At present, members of a DB scheme pension the pension may die with you, or at best a spouse may get 50% of it. Taking a transfer value provides control and ownership. It also offers an Approved Retirement Fund option, allowing you to pass residual funds on to dependents instead of the pension fund ending with you.

Access

Taking a transfer value means you can access funds, or ‘retire’ from age 50.

Chief Economics Editor of the Financial Times, Martin Wolf, has said ‘at current ultra-low interest rates, the transfer value of a DB pension has become significantly overvalued.’

Defined Benefit scheme pensioners in payment have preferred rights versus active and deferred members in a scheme wind-up (not a joke). Furthermore, scheme managers can change DB scheme rules without members’ control, such as raising retirement age or cancelling indexation.

To say there is some injustice in this is an understatement, but the reality is if the company goes wallop or decides not to pump in the increased funds required to meet the covenant…

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