DB pension scheme winding up options
Discussion
I received a letter yesterday concerning a pension scheme I was a member of nearly 30 years ago. They say that the plan will be wound up and a bulk annuity policy has been purchased to assure our future benefits. I'm about 10 years away from receiving it. It won't be huge but fair enough. So far so good.
The problem comes later when they inform us that the plan currently has a not insignificant surplus and that they have decide to return this to the company , as in their words "it could be expensive and impractical to adjust [our benefits]" and after all the company paid for some of the benefit so why not return the surplus to them. I have a problem with this as of course I also contributed so I don't see why I shouldn't benefit.
I'm also annoyed as another scheme I paid into in the past was underfunded by the employer, went bust, and now I will receive a significantly smaller government funded pension from this plan. It seems like company pays up, company wins, company doesn't pay up, employee loses.
Apparently I'm allowed to make written representation to the Trustee to let them know what I think about this idea, which is remarkably kind of them, but is there any point at all?
The problem comes later when they inform us that the plan currently has a not insignificant surplus and that they have decide to return this to the company , as in their words "it could be expensive and impractical to adjust [our benefits]" and after all the company paid for some of the benefit so why not return the surplus to them. I have a problem with this as of course I also contributed so I don't see why I shouldn't benefit.
I'm also annoyed as another scheme I paid into in the past was underfunded by the employer, went bust, and now I will receive a significantly smaller government funded pension from this plan. It seems like company pays up, company wins, company doesn't pay up, employee loses.
Apparently I'm allowed to make written representation to the Trustee to let them know what I think about this idea, which is remarkably kind of them, but is there any point at all?
You could try but it’s possibly not worth the hassle.
In short, the scheme is paying you exactly what it promised it would when you joined and paid your contributions. The way defined benefit schemes work, the funding risk sits with the employer and after you’ve paid your contributions, it’s they who are on the hook for ensuring the scheme is sufficiently funded to meet that obligation.
If at a point in the past, the scheme was assessed as underfunded, they’ll have been required to make additional deficit funding contributions. Most schemes were in that position until fairly recently and funding surpluses have come about largely from changes in interest rates and softening of future mortality improvements.
The scheme never required you to dip into your own pocket in the past to make up any shortfall, so there’s a reasonable argument to say that on the flipside, you don’t get to share in the surplus when times are good.
Having said that, the trustees of the scheme are required to act in the best interests of the members. It will depend what the scheme’s Trust Deed and Rules say on the matter to some extent but it’s not uncommon for there to be a clause requiring them to consider augmenting members benefits if there is a surplus on wind up. You could ask for a copy of the TD&R and for them to explain how they are satisfied that they’ve properly discharged their responsibilities to the members. But in reality, they’re likely to have a fair bit of latitude to make the decision they have.
If it’s any consolation, the company will get hit with a tax charge on the refund.
In short, the scheme is paying you exactly what it promised it would when you joined and paid your contributions. The way defined benefit schemes work, the funding risk sits with the employer and after you’ve paid your contributions, it’s they who are on the hook for ensuring the scheme is sufficiently funded to meet that obligation.
If at a point in the past, the scheme was assessed as underfunded, they’ll have been required to make additional deficit funding contributions. Most schemes were in that position until fairly recently and funding surpluses have come about largely from changes in interest rates and softening of future mortality improvements.
The scheme never required you to dip into your own pocket in the past to make up any shortfall, so there’s a reasonable argument to say that on the flipside, you don’t get to share in the surplus when times are good.
Having said that, the trustees of the scheme are required to act in the best interests of the members. It will depend what the scheme’s Trust Deed and Rules say on the matter to some extent but it’s not uncommon for there to be a clause requiring them to consider augmenting members benefits if there is a surplus on wind up. You could ask for a copy of the TD&R and for them to explain how they are satisfied that they’ve properly discharged their responsibilities to the members. But in reality, they’re likely to have a fair bit of latitude to make the decision they have.
If it’s any consolation, the company will get hit with a tax charge on the refund.
That is a good answer. Yes, check the deed and rules around the options that the Trustees have regarding a surplus and the balance of powers i.e. what can they do with / without the agreement of the sponsoring employer, and vice versa.
For the other scheme, assuming it was picked up by the PPF (Pension Protection Fund) you should get 90% of your benefits if under £30k p.a.
For the other scheme, assuming it was picked up by the PPF (Pension Protection Fund) you should get 90% of your benefits if under £30k p.a.
It's not unknown that this tactic has been used by companies to remove funds. If you go back one of the best DB pensions schemes around was the old Tube Investments scheme.
The group management identified companies within the group to be divested to move it away from traditional tube and 'metal bashing' commodity product enterprises with labour intensive operations. These companies were sold off, their share of the pension funds were transferred to the new owners preserving the accrued pensions of the employees, but the very considerable surpluses were retained. There were many such divestment instances.
The group was then converted through acquisition and mergersfrom one making commodity products to a much more specialised engineering business.
The group management identified companies within the group to be divested to move it away from traditional tube and 'metal bashing' commodity product enterprises with labour intensive operations. These companies were sold off, their share of the pension funds were transferred to the new owners preserving the accrued pensions of the employees, but the very considerable surpluses were retained. There were many such divestment instances.
The group was then converted through acquisition and mergersfrom one making commodity products to a much more specialised engineering business.
Regarding the 'too difficult to apportion the surplus to the beneficiaries' story, a DB scheme I'm a future beneficiary of, from an old employer, has done just that this year.
There is a surplus which amounts to enough for everyone to receive an increase of 11%+ on their current or future pension so that's what they're giving us. No song and dance about how difficult it is, just a letter to say they're increasing our pensions because of the surplus.
There is a surplus which amounts to enough for everyone to receive an increase of 11%+ on their current or future pension so that's what they're giving us. No song and dance about how difficult it is, just a letter to say they're increasing our pensions because of the surplus.
I'd be questioning if there is any additional risk or regulation or anything along those lines related to the change in circumstances. Ie are the bulk annuities protected by the FSCS in the same way as if you bought the annuity yourself with a private DC pot?
Obviously it's unlikely (or in most eyes, will never happen), and that insurers will have offsetting life books, reserves, re-insurance contracts, etc, but when a disaster strikes it is often in a blind spot that experts agree will never happen.
It might turn out that the surplus and/or the existence of the scheme turn out be to very important in future.
I'd be asking questions like that, fully expecting it to fall on deaf ears but at least it's worth a shot. Also to the previous poster, it feels quite telling if that is what they've done and gone and done the deal with the insurer first, to ensure they can fall back on the difficulty aspect later as justification.
I don't think the members should have the right to be a direct beneficiaries of the additional funds, ie your benefit should be defined by what was originally agreed. However if there is additional risk or some other change as a result of the change in circumstances I do think you deserve the benefit of the protection of the extra funds or being a member of a scheme.
Would be a nice gesture maybe if they took a slice of the surplus and used that as a one off distribution, not sure of the legalities but surely could distribute say a voucher to everybody already in the payment phase and maybe an index linked similar voucher for when the remaining members reach retirement age. Probably too expensive to administer and also it's not the sort of world we live in anymore sadly.
Obviously it's unlikely (or in most eyes, will never happen), and that insurers will have offsetting life books, reserves, re-insurance contracts, etc, but when a disaster strikes it is often in a blind spot that experts agree will never happen.
It might turn out that the surplus and/or the existence of the scheme turn out be to very important in future.
I'd be asking questions like that, fully expecting it to fall on deaf ears but at least it's worth a shot. Also to the previous poster, it feels quite telling if that is what they've done and gone and done the deal with the insurer first, to ensure they can fall back on the difficulty aspect later as justification.
I don't think the members should have the right to be a direct beneficiaries of the additional funds, ie your benefit should be defined by what was originally agreed. However if there is additional risk or some other change as a result of the change in circumstances I do think you deserve the benefit of the protection of the extra funds or being a member of a scheme.
Would be a nice gesture maybe if they took a slice of the surplus and used that as a one off distribution, not sure of the legalities but surely could distribute say a voucher to everybody already in the payment phase and maybe an index linked similar voucher for when the remaining members reach retirement age. Probably too expensive to administer and also it's not the sort of world we live in anymore sadly.
lauda said:
It’s not that straightforward if you’ve already settled all benefits with an insurer. You’d have to reopen and amend the terms of the original contract and that would be a ballache and incur a load more legal, actuarial and administrative expenses.
From what the OP said the announcement of there being a surplus happened at the same time as the engagement with the insurer, not after?PorkInsider said:
lauda said:
It’s not that straightforward if you’ve already settled all benefits with an insurer. You’d have to reopen and amend the terms of the original contract and that would be a ballache and incur a load more legal, actuarial and administrative expenses.
From what the OP said the announcement of there being a surplus happened at the same time as the engagement with the insurer, not after?The bottom line is that the members have all got the full benefits they’re entitled to. In a DB scheme, the risks and rewards sit with the employer. If you want to benefit from potential upside, transfer it to a DC scheme and take the potential risk of the downside too.
Thanks to everyone for the very thorough answers. I will request a copy of the trust rules and see what it says.
To answer some of the other questions. The bulk annuity policy was purchased back in 2021, I believe a few years after the plan was effectively closed to anyone contributing to it following a series of mergers and acquisitions of the original company. They used the bulk annuity to pay into the plan to fund the needs of the members who were already retired. Now the company wants to completely close the plan down so they will use the bulk annuity to buy us individual policies that will guarantee our future pay outs. These have been agreed and calculated and they think that when all of these policies are purchased there will be a sum of money left in the bulk annuity and this is what they will return to the company. Having dug through all the papers that they've sent me it looks likely that the surplus is less than a couple of percent of assets so I guess fairly insignificant overall. The bulk annuity has been protected by the FSCS.
As I'm getting to the age where all this becomes relevant and I'm currently resident in France and there are clearly plenty of experts around can anyone recommend a good starting place to learn about QROPS options without being bombarded by sales people?
To answer some of the other questions. The bulk annuity policy was purchased back in 2021, I believe a few years after the plan was effectively closed to anyone contributing to it following a series of mergers and acquisitions of the original company. They used the bulk annuity to pay into the plan to fund the needs of the members who were already retired. Now the company wants to completely close the plan down so they will use the bulk annuity to buy us individual policies that will guarantee our future pay outs. These have been agreed and calculated and they think that when all of these policies are purchased there will be a sum of money left in the bulk annuity and this is what they will return to the company. Having dug through all the papers that they've sent me it looks likely that the surplus is less than a couple of percent of assets so I guess fairly insignificant overall. The bulk annuity has been protected by the FSCS.
lauda said:
If it’s any consolation, the company will get hit with a tax charge on the refund.
Only a very little As I'm getting to the age where all this becomes relevant and I'm currently resident in France and there are clearly plenty of experts around can anyone recommend a good starting place to learn about QROPS options without being bombarded by sales people?
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