Terrible Dispatches On Pensions

[justthisbloke]

I've got over a decade in a DB scheme. Not OTT generous by DB standards but good relative to the the alternatives.

It is fully funded but the demographic bulge it needs to cover means that the company is pouring money into it each year to maintain its funded-ness. The particular scheme was de facto closed not long after I joined so I'm likely to be on the tail end of claimants.

If I can get even half the amount of my 'promise' out of them I won't have reason to complain but 25 years is a long time...

I've also got a few years of a DB pension that won't pay out for decades. I've asked for a valuation to transfer out - at least then I'll be able to see and understand the risks. Now is probably the ideal time to transfer out.

However, I remain undecided. It's a form of diversification. I can have an equity heavy portfolio as a counterweight to the DB pension. I looked at the funds holdings and it was far more bond heavy than I'd imagined - presumably because I was one of the last in and most of the scheme members are now drawing their pensions.

[Sour Mash]

The main question to ask is, why is it we used to be able to afford these pensions and now we can't, even though the economy is much larger.

Yes, that goes for a lot of other stuff too. Like student loans and tuition fees vs grants and paid fees for example. How was it when the economy was smaller and deficits were non-existant (or very small), the state was able to pay all that stuff out yet now that the economy is very much larger and the state happily runs huge deficits with no real plan to ever pay the accumulated debt back (other than maybe monetising it), none of this can be afforded any more?

Something is very fishy in terms of where all the gains from productivity improvements and a greatly expanded economy have gone.

[iamnumerate]

Yes, that goes for a lot of other stuff too. Like student loans and tuition fees vs grants and paid fees for example. How was it when the economy was smaller and deficits were non-existant (or very small), the state was able to pay all that stuff out yet now that the economy is very much larger and the state happily runs huge deficits with no real plan to ever pay the accumulated debt back (other than maybe monetising it), none of this can be afforded any more?

Something is very fishy in terms of where all the gains from productivity improvements and a greatly expanded economy have gone.

I agree IMHO this is because

1) Less people went to university. Personally less people going to university to study useful things and it being funded by the state would be better than the status quo

2) People live longer - this is obviously good

3) More passengers pro single parents and people on invalidity benefits

4) Planning controls and housing benefit etc making housing more expensive.

[spyguy]

Why didn't she get another job? Or did you mean to write coal miner and put teacher by mistake?

I would vote for you if stood for election

She didn't need to. he made up her contributions to if she retired at 60 and gave her a lump sum.

The council saved money on their current wage bill/headcount by moving the liability to the pension scheme.

All these little short term dodges with large long term costs are coming home to roost.

[iamnumerate]

She didn't need to. he made up her contributions to if she retired at 60 and gave her a lump sum.

The council saved money on their current wage bill/headcount by moving the liability to the pension scheme.

All these little short term dodges with large long term costs are coming home to roost.

Short termism, naviety and projectionism are responsible for most of the problems in the UK.

(By projectionism I mean thinking "I wouldn't get pregnant to get free housing so no one else will" or "Iraqis are just like us, if we save them from Saddam they will love us. Saddam killed Muqtada al-Sadr's dad so he will love us")

[spyguy]

I've also got a few years of a DB pension that won't pay out for decades. I've asked for a valuation to transfer out - at least then I'll be able to see and understand the risks. Now is probably the ideal time to transfer out.

However, I remain undecided. It's a form of diversification. I can have an equity heavy portfolio as a counterweight to the DB pension. I looked at the funds holdings and it was far more bond heavy than I'd imagined - presumably because I was one of the last in and most of the scheme members are now drawing their pensions.

I know a few people under 50 with DB pensions with a good few years contributions - 20-30 years.

Id be worried.

The current batch of retirees will be eating through the pensions funds assets.

DB pensions were designed for 10-15 years of retirement.

The UK is seeing people living well into their 80s/90s.

I remember being told that actuaries were really smart and good at maths.

They have two questions to answer: How long will I live? How much will my investments return?

Impossible to answer, I know.

But off they go, making complicated models that were totatlly fcking wrong.

Throwing a dart would have been better.

[porca misèria]

On previously earned final salary years, is the 'final salary' they will link to, the actual final salary of the person in public service. Or the final salary before they left the final salary scheme, upped by inflation to the date they actually retire?

Back in the '80s, it was standard knowledge that final salary schemes were useless if you expected to move job much. One or two eightieths of £6k don't look much today.

All pensions are based on tithing the currently working generation via some mechanism. Directly as per the local government schemes where current worker contributions make up a large percentage of the payments pensioners. But, if you hold a portfolio of shares and everything looks tickety-boo funded; where do the dividends come from, where does the value come from?

The value comes from the value you created in your working life. You remember, when you wrote your bestseller; when you invented the best thing since sliced bread and employed those 200 people to produce it.

Or at least it was, in the days when money was a store of value.

[doomed]

We are currently living through the end game of our current monetary system imo. The unfunded promises that have been dished out simply will not be honoured in anything close to real terms. Anybody that has retired in the last 20 years have made out like bandits but what can't continue must stop.

[Shrink Proof]

On previously earned final salary years, is the 'final salary' they will link to, the actual final salary of the person in public service. Or the final salary before they left the final salary scheme, upped by inflation to the date they actually retire?

Not sure about other public sector areas, but in the NHS the "final salary" that's used in the pension calculation is the best of the last three full years in NHS employment as it was at the time you stopped working. Your pension is 1/80 of that for each full year of service. So if you did 3 years working for the NHS 30 years back and were earning (say) £15,000 p.a. when you left, when you come to the national pension age (whatever it turns out to be by then - 66, 67, 68....) you will get 3/80 of £15,000. No adjustment for any inflation during the intervening years. So it's massively in your interest to stay in the NHS for decades.

[silver surfer]

I've also got a few years of a DB pension that won't pay out for decades. I've asked for a valuation to transfer out - at least then I'll be able to see and understand the risks. Now is probably the ideal time to transfer out.

However, I remain undecided. It's a form of diversification. I can have an equity heavy portfolio as a counterweight to the DB pension. I looked at the funds holdings and it was far more bond heavy than I'd imagined - presumably because I was one of the last in and most of the scheme members are now drawing their pensions.

I may have missed a previous comment of yours, if I have then apologies, but I can't see where you've asked the most important question regarding your DB pension. How well funded is your scheme?

You'll find that information in the annual update that they send you. If, as you suggest, your scheme is mature then it's up to you to evaluate if the future trading prospects of the company are sufficient to plug any shortfall. Also be aware that actuarial prudency means any scheme with better than say 80% funding is actually in pretty good shape.

If your scheme passes this test then IMO you're right to think that a well funded DB scheme is a valuable compliment to your personal equity holdings. By and large bailing out of a well funded DB scheme is a mistake. By all means get a quotation, but evaluate that quotation against a matching annuity (taking into consideration your age, marital situation, possible RPI increases, health, etc) and you'll likely find that the DB payments look pretty good. What you shouldn't do is evaluate that quotation against, say, a portfolio of high yielding shares as the risk profile is completely different.

[silver surfer]

Not sure about other public sector areas, but in the NHS the "final salary" that's used in the pension calculation is the best of the last three full years in NHS employment as it was at the time you stopped working. Your pension is 1/80 of that for each full year of service. So if you did 3 years working for the NHS 30 years back and were earning (say) £15,000 p.a. when you left, when you come to the national pension age (whatever it turns out to be by then - 66, 67, 68....) you will get 3/80 of £15,000. No adjustment for any inflation during the intervening years. So it's massively in your interest to stay in the NHS for decades.

I can't speak for all private sector DB schemes, but the four or five that I'm intimately familiar with treat deferred members (people who have left employment with that company) reasonably well. Their pensions are not frozen at the moment they left, but continue to grow at least to some extent. In fact there was a weird situation I once encountered where an effective pay freeze for a year meant that deferred members actually did better, albeit temporarily, than the active members who remained in the employment of that company.

[19 year mortgage 8itch]

Not sure about other public sector areas, but in the NHS the "final salary" that's used in the pension calculation is the best of the last three full years in NHS employment as it was at the time you stopped working. Your pension is 1/80 of that for each full year of service. So if you did 3 years working for the NHS 30 years back and were earning (say) £15,000 p.a. when you left, when you come to the national pension age (whatever it turns out to be by then - 66, 67, 68....) you will get 3/80 of £15,000. No adjustment for any inflation during the intervening years. So it's massively in your interest to stay in the NHS for decades.

Are you sure there is no indexation in the intervening period as that does not sound right.

[19 year mortgage 8itch]

I can't speak for all private sector DB schemes, but the four or five that I'm intimately familiar with treat deferred members (people who have left employment with that company) reasonably well. Their pensions are not frozen at the moment they left, but continue to grow at least to some extent. In fact there was a weird situation I once encountered where an effective pay freeze for a year meant that deferred members actually did better, albeit temporarily, than the active members who remained in the employment of that company.

Seeing that my wages rises have been below RPI for several years, the deferred members in my scheme have been getting a better deal for several years.

[winkie]

All pensions are based on tithing the currently working generation via some mechanism. Directly as per the local government schemes where current worker contributions make up a large percentage of the payments pensioners. But, if you hold a portfolio of shares and everything looks tickety-boo funded; where do the dividends come from, where does the value come from?

QE and volatility....?

[Shrink Proof]

Are you sure there is no indexation in the intervening period as that does not sound right.

That's how it was explained to me when I worked for the Notional Health Service and I never saw or heard anything to contradict it. Certainly the feeling was that multiple changes of jobs would punish you, pensions-wise. Mind you, if you worked in the clinical areas as I did, those around you are folk like doctors and nurses, who are in for the duration - for clinical staff, the NHS is an almost monopoly employer and there aren't that many alternative employers if you're trained as a psychiatrist or an A&E nurse. I never discussed it with those who have more transferable skills (IT folk, secretaries, finance bods, etc.) who would be more likely to leave and work somewhere else. But the NHS pension scheme has been revised several times in recent years, so somebody else may have different information...

[Habeas Domus]

Not sure about other public sector areas, but in the NHS the "final salary" that's used in the pension calculation is the best of the last three full years in NHS employment as it was at the time you stopped working. Your pension is 1/80 of that for each full year of service. So if you did 3 years working for the NHS 30 years back and were earning (say) £15,000 p.a. when you left, when you come to the national pension age (whatever it turns out to be by then - 66, 67, 68....) you will get 3/80 of £15,000. No adjustment for any inflation during the intervening years. So it's massively in your interest to stay in the NHS for decades.

If you leave the NHS before you reach pensionable age and do not transfer the benefits to

another pension scheme, you will become a 'deferred member’. This is because payment of

pension is 'deferred' until normal pension age.

Deferred main Scheme benefits are increased each year by the rate of inflation to protect

their value and will normally be paid when you reach age 60 for the 1995 Section or 65 if in

the 2008 Section.

http://www.nhsbsa.nhs.uk/Documents/Pensions/member_Deferred_Benefits_V2.0_07.2013.pdf

[SpectrumFX]

The NHS have now moved to a Career Average Scheme. Interestingly they would appear to have kept the link to actual final salary for the deferred historical benefits that staff may contain in their old schemes. At least that's what I think they're trying to say in the very poorly worded paragraph quoted below.

http://www.nhsbsa.nhs.uk/Pensions/4017.aspx

Provided you have not had a continuous break in NHS pensionable employment of five years or more ending after you join the 2015 Scheme, the 1995/2008 Scheme benefits will be based on your final salary at or near retirement. This is known as ‘final salary linking’. The final salary is the best of the last three years in the 1995 Section or the average of the best three consecutive years out of the last ten in the 2008 Section.

Edited July 20, 2016 by SpectrumFX

[spyguy]

I had a heated argument with my partner's Headteacher on pensions.

Tehy were striking over the move to career average.

I'd explained its not fair if someone is on 20k for 60 years, then 100k for 5, then their pension should be 2/3 of 100k.

(Figures were used for illustration).

Oh but its not fair she said.

In that case, I replied, if you lose you job before retirement, earning of 0k at retirement then your pension should be 2/3 of 0k then?

[SpectrumFX]

I had a heated argument with my partner's Headteacher on pensions.

Tehy were striking over the move to career average.

I'd explained its not fair if someone is on 20k for 60 years, then 100k for 5, then their pension should be 2/3 of 100k.

(Figures were used for illustration).

Oh but its not fair she said.

In that case, I replied, if you lose you job before retirement, earning of 0k at retirement then your pension should be 2/3 of 0k then?

The trouble with final salary, is that it's open to abuse. I don't know about custom and practice in the teaching profession, but I used to work in the Civil Service. It was quite normal to see people with long service promoted up to high paying jobs for the last couple of years, with the apparent intent of boosting their pension.

[silver surfer]

Interestingly they would appear to have kept the link to actual final salary for the deferred historical benefits that staff may contain in their old schemes. At least that's what I think they're trying to say in the very poorly worded paragraph quoted below.

http://www.nhsbsa.nhs.uk/Pensions/4017.aspx

That's more than likely, and it's pretty logical too. Accrued benefits (i.e. the historical bit) is a contractual obligation, so there's no changing that without a hotly contested legal action that's almost certainly doomed to fail. I've got a similar situation with my pension, the majority of it is subject to RPI based increases, but following a change by the company the last few years are capped at RPI to a maximum of 2.5%, however they fully acknowledged that they were only at liberty to change the benefits going forward, accrued pension benefits are effectively a legally binding debt that the company has no alternative (other than bankruptcy) but to honour.

[justthisbloke]

Generally, accrued benefits are protected - they can only move the goal posts going forward. All reasonable.

However, I think they can make retrospective changes with the agreement of the members of the fund. At least something like that happened to me. When I joined, the deal was that people retired at 60 (!) or could take an early pension (reduced by 4% per year early) from 50 (!!). This was changed with earliest retirement dates being pushed back according to some complex age-based algorithm. No one asked me and I certainly didn't agree. I'm blaming (assuming) it was collective negotiation with the unions who were probably presented with a choice between closing the scheme completely or agreeing to changes that wouldn't effect too many of their largely aged members.

[Shrink Proof]

If you leave the NHS before you reach pensionable age and do not transfer the benefits to

another pension scheme, you will become a 'deferred member’. This is because payment of

pension is 'deferred' until normal pension age.

Deferred main Scheme benefits are increased each year by the rate of inflation to protect

their value and will normally be paid when you reach age 60 for the 1995 Section or 65 if in

the 2008 Section.

http://www.nhsbsa.nhs.uk/Documents/Pensions/member_Deferred_Benefits_V2.0_07.2013.pdf

Thanks for that, I stand corrected. So the NHS wasn't straight with me. Who would've thought it?

[silver surfer]

I had a heated argument with my partner's Headteacher on pensions.

Tehy were striking over the move to career average.

I'd explained its not fair if someone is on 20k for 60 years, then 100k for 5, then their pension should be 2/3 of 100k.

(Figures were used for illustration).

I tend to agree with you, career average is a fairer basis for determining a pension than final salary. However, speaking as a trustee for a pension fund, it's easy to understand how final salary became the norm.

Most trustees tended to be senior managers who had been promoted multiple times. So they didn't need much encouragement, especially during the good years when pension surpluses were common, to vote for final salary. We shouldn't lose sight of the fact that a DB pension is a pretty sweet deal for nearly everyone concerned, so the guys making the rules could still have a relatively clear conscience when they tilted the playing field to give themselves an even sweeter deal than most. It's also easy to understand how final salary could be sold up the line to the sponsoring company, it "encourages loyalty, long service, and ambition" might have been the pitch.

I very much doubt, during the good years, that the scheme actuaries ever even presented the trustees with a similar cost alternative, say something along the lines of the current state pension "triple lock" but tied to a career average option, so in fairness the "gin and Jag" brigade that normally constitute pension fund trustees wouldn't have even known they could have taken a different and more equitable direction.

But isn't that the way the world usually works? Not so much out and out criminality; more just equal measures of self interest, ignorance, and bumbling along within the confines of the law?

[silver surfer]

Generally, accrued benefits are protected - they can only move the goal posts going forward. All reasonable.

However, I think they can make retrospective changes with the agreement of the members of the fund. At least something like that happened to me. When I joined, the deal was that people retired at 60 (!) or could take an early pension (reduced by 4% per year early) from 50 (!!). This was changed with earliest retirement dates being pushed back according to some complex age-based algorithm. No one asked me and I certainly didn't agree. I'm blaming (assuming) it was collective negotiation with the unions who were probably presented with a choice between closing the scheme completely or agreeing to changes that wouldn't effect too many of their largely aged members.

I don't know the details of your particular scheme, but a few years ago the law was changed to prevent the taking of a company pension before the age of 55 (I seem to recall there are one or two small exceptions like professional athletes or in the case of disability, however for almost everyone else 55 is now the minimum). In these circumstances the pension scheme rules would have to change to reflect the new legislation. I suspect that's what has happened to your scheme.

[NuBrit]

I don't know the details of your particular scheme, but a few years ago the law was changed to prevent the taking of a company pension before the age of 55 (I seem to recall there are one or two small exceptions like professional athletes or in the case of disability, however for almost everyone else 55 is now the minimum). In these circumstances the pension scheme rules would have to change to reflect the new legislation. I suspect that's what has happened to your scheme.

If you're under the age of 40, then you won't be able to take early retirement until you are 58 now