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 email@example.com.
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