Should you take a transfer from a Defined Benefit Pension?

This is a topic which has been getting a lot of coverage in the media in recent weeks, it is believed that the combined pension deficit among some of Irelands largest companies is almost €3 billion, this includes employers such as CRH, Smurfit, Kerry Group, CIE & An Post, in fact the employer with the largest deficit is Bank of Ireland which has a hole of almost €900m in its fund. But what does all this mean? If you are an employee of one of these companies or indeed any company with a Defined Benefit Pension then hopefully this article will make things a little bit clearer.

Firstly, what exactly is a Defined Benefit Pension Scheme?

A defined benefit (DB) pension scheme sometimes known as a ‘final salary’ scheme seeks to provide members with guaranteed retirement benefits based on a combination of a member’s final salary at their retirement age & their pensionable years of service.

These retirement benefits usually consist of a Tax free Lump sum of up to 1 ½ times final salary and/or an annual pension payment of up to 2/3 final salary (nice if you can get it)

However, at a time when we are experiencing historically low Interest rates along with falling Bond yields it means many of the “promises” made by these pension schemes are becoming increasingly difficult to keep and in some cases are completely unsustainable. Because of these low interest rates & bond yields, many of these DB schemes are now technically underfunded therefore making it impossible for them to meet their future liabilities to their employees

There are usually only a couple of options available to any business wanting to address this problem: one of them is a Transfer value (TV). Currently in Ireland, many former employees of Companies with DB Schemes (these are known as deferred members) are being offered ‘enhanced’ transfer values as an enticement to leave their scheme. This can often be a very attractive figure, nevertheless it is important to recognise that there are many factors to be considered in making a decision whether to accept such an offer.

What is a Transfer Value or an Enhanced Transfer Value (‘ETV’)?

In short, the trustees and Actuaries who run the pension scheme would convert the benefits you’ve built up in the scheme over the years and put a value on it in todays terms, This is whats known as a ‘transfer value’ (TV). However as mentioned above, some employers who’s funds are in deficit are offering their deferred members a financial incentive to transfer out of the scheme. In most cases, this incentive takes the form of an enhancement to the transfer value, this is commonly known as an ‘enhanced transfer value’ (ETV). It was widely reported in recent weeks that Bank of Ireland was offering some of its former employees Enhancements of up to 200% if they were willing to leave the scheme.

What happens if I accept the transfer value?

If you decide to take the transfer value on offer, you are effectively transferring the responsibility of the management of your pension from the trustees of your DB scheme to a personal pension chosen by you.

What are some of the reasons not to take the transfer value now?

• You may be confident that the current DB scheme is well-funded and will pay out the promised annual pension to you in retirement.
• You may believe that a higher transfer value will be offered to you in the future
• Your personal circumstances may dictate that you require a defined level of income in retirement and will not accept the risks involved in taking a Transfer.

Why might you consider taking the transfer value now?

• You might wish to access your pension benefits now, as you can potentially access your pension from age 50 if you take a transfer.
• You believe that the solvency of the scheme may deteriorate even further, which could lead to a lower transfer value offer in the future;
• A fear that if you do stay in the DB scheme as a deferred member, that you might not receive the annual pension benefits you are promised once you come to retirement. 

Taking a transfer value offer from a DB scheme is an irreversible decision so it is important to seek professional financial advice before making any decisions. An Independent adviser should be able to guide you through the process, explain all of the pros & cons, financial implications etc but ultimately the final decision belongs to the deferred member themselves.

Barry Kerr BBS QFA CFP® is the owner of Wealthwise Financial Planning in Bridge St, Carrick on Shannon, www.wealthwise.ie. Barry Kerr T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.