Should you be worried about your Defined Benefit pension?
Defined Benefit (DB) schemes were set up at a time when people tended to have a job for life and the pension was a promise from the employer to support the worker in retirement. A DB scheme is based on your salary and how long you worked for your employer.
In 2011, employee take up of DB pensions was at an all-time low – just 9%, Office for National Statistics show and Tom McPhail, head of retirement policy at Hargreaves Lansdown, says companies have been closing the schemes to new members, incentivising deferred members to transfer out and changing to calculate pensions on a career average rather than final salary.
But with the recent collapse of high street chain BHS and metal firm Tata Steel, DB schemes have come to the forefront. So should you be concerned about your own DB scheme?
Below, Carolyn Jones, head of proposition at Fidelity International, lists three essential pointers for you to consider:
1) Employer’s ‘health’ and pension scheme deficit
Most DB schemes show some sort of deficit and this is ok while there is a solvent employer standing behind the scheme with a plan in place to manage the deficit. So people may look at the strength of their employer to assess whether their pension is at risk, though this can often be difficult to assess.
To find out whether the scheme is in deficit, ask to see a copy of the scheme valuation and also details of the recovery plan and timescales. The length of the recovery plan may be indicative of the employer’s ability to support the scheme.
2) DB schemes come under the Pension Protection Fund
Even if the sponsoring employer goes bust DB schemes are protected by the Pension Protection Fund which pays compensation to scheme members.
But the compensation may not be the full amount and many will only get 90% of the expected benefit up to a cap (£37,420.42 in 2016).
Don’t automatically assume everyone gets the same. A potential pay out varies according to all sorts of factors including whether you’ve already retired, your age and whether you would be subject to the cap. See more on the Pension Protection Fund site.
3) Scheme rule changes and transferring to a Defined Contribution pension
With so many schemes in deficit, many have changed their rules in order to limit liability and cost. These changes include aspects such as the definition of pensionable pay, retirement age or the rate benefits build up. Find out exactly what you’ve got as any of the above should make you look at whether the scheme still provides you the best value.
Recent pension changes also mean that if someone is in a private sector DB scheme they can transfer to a Defined Contribution pension (based on how much is paid in and put into investments by the pension provider).
This may seem like a good option especially in light of the pension freedoms which took effect last year, allowing you to access your pension more flexibly, but most people would be worse off.
There are only a small number of circumstances where this option may be worth considering. This includes if you have significant benefits in a DB plan and there is reason to believe the employer is in trouble. This isn’t a decision to be taken lightly and if pension savings are £30,000 or more, the member is required by law to take advice before transferring.