Historically in
Ireland Defined Benefit (DB) Pension Schemes were the means by which employers
provided pension benefits for their employees. For a variety of reasons this
has changed, and DB schemes are now increasingly seen as a relic of a bygone
era. In this article we will look at why this has happened; and more
importantly what to do if you have assets in a DB plan.
DB plans were
considered the Rolls Royce of pension schemes and for some people – mainly public
servants – they still are. Through a DB plan an employer promises an employee a
benefit based on the employee’s final salary on retirement. For example, if you
were earning €60,000 on retirement, you could be promised a €40,000 p.a.
pension.
These plans were very
popular – in 1996 there were some 22,000 DB schemes in Ireland. However, in 2018
there were only 611 schemes remaining, 74% of which were closed to new members*.
In that time some employees who thought they had a secure retirement saw their
employer (for example Waterford Wedgwood plc) renege on their promised pension,
leaving them and their families in a precarious position in retirement.
What caused this fall
from grace for DB plans? The simple answer is cost. The cost of DB schemes for
employers went up because people were living longer, the cost went up because
interest rates fell significantly, and the cost went up for regulatory reasons.
Employers could not afford these costs and cut back on or closed schemes.
So, what do you do if
you are in a defined benefit plan? You may have the choice of taking a transfer
payment to another Defined Contribution (DC) scheme, or to leave your
entitlement in your DB scheme. The decision you take will be a personal one and
should not be taken lightly. It is highly recommended that in doing so you seek
advice from an Advisory firm which has experience in dealing with Defined
Benefit transfers.
In choosing whether to take the transfer from defined benefit pension you should consider the following:
- Is the DB plan
fully funded?
- Could the
funding position get worse?
- Are you
prepared to take on the Investment Risk if transferring to a DC pension?
- Does the
transfer payment properly reflect the cost of the pension you are foregoing?
- Do you
place more value on a potentially more secure retirement income or the value of
your estate?
- Is there
an enhanced transfer payment from the DB scheme to encourage transfers?
- How strong
is the employer who sponsored the scheme, will they make contributions over
time to make up any funding gap?
- Are there
alternatives to the DB scheme that better meets your needs?
In some cases,
Trustees are taking this decision away from scheme members by winding up the DB
scheme. In this scenario you will need to consider how best to invest the
pension assets, to properly provide for retirement. A key message from the move
from DB to DC pensions is that the need to consider pension funding has never
been greater. The demise of DB schemes has highlighted the cost of adequately
providing for retirement, a cost that has now been pushed from employers to the
employee.
Harvest Financial
Services provides advice in all aspects of pension planning be it, the choices
available on transfers from DB schemes, setting up a new scheme or adequately
providing for retirement. We can advise on a flexible range of pre and post
retirement options, from traditional Insurance Company schemes to more flexible
self-administered options.
*Source: IAPF 2018 survey on Defined Benefit (DB) pension schemes in
Ireland.
For more information, or to arrange a meeting to discuss your retirement provision needs, please contact us on 01 2375500 or email justask@harvestfinancial.ie.
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