Do you ever think of yourself as a financial burden to your employer? Well if you're a high earner with a defined benefit (DB) pension linked to your salary then you probably are one. So much so, that as many as one in five FTSE 250 companies is making plans to lure staff on track for a £250k pension pot or more (employees who are earning £80k a year or more) out of their 'gold-plated' pension plans - and into 'inferior' defined contribution schemes.
Deciding what to do could leave you with a massive headache. Should you accept these deals or stick with what you've got? Before you decide, you need to get the facts straight.
The first thing you need to know is the truth about why you’re being made this offer. DB pensions are crippling companies' finances because they are unsustainably generous and expensive to run. A killer combination of rock bottom gilt yields and the increased life expectancy of savers is sending liabilities through the roof.
To add fuel to the fire, fears are building about impending European Commission insurance laws slapping on an extra 90 per cent to the running cost of DB schemes, giving companies an extra reason to limit the number of people they serve.
Over 90,000 DB scheme members have been offered Enhanced Transfer Values (ETVs) to leave their DB schemes in the past three years, with a further 70,000 expected this year alone, a KPMG survey has found. These new, targeted deals work out cheaper and more efficient to your employer, because if you and the other heavy-weights within your scheme leave, they can consider most of the financial pressure 'dealt with'.
Pension scheme trustees were previously too nervous to go ahead with such deals, but a new industry code of 'good practice' has given them the green light to target groups of high earners in schemes with ETV deals to try and tempt them out, which is why you're more likely to be offered a deal at some point this year.
There are no prizes for guessing there's something in this for your employer. But is there anything in it for you? Not according to Danny Cox, head of advice at Hargreaves Landsdown, who says you should work by the rule of thumb that you would be better off staying in your DB scheme. He warns that by transferring out of DB, you're accepting carrying the risk of inflation and investment that come with DC. "Leave that risk with your employer," he says.
A cause for concern also lies in the fact the Pensions Regulator is suspicious of these deals, which it classifys as "selective offers to certain scheme members which are seeking to advantage one section of membership over another".
A key number you need to look out for to decipher whether you're getting a good deal is the standard critical yield. This is the returns you'd need to make on your DC investments for your new pot to match your old pot under the deal. Of course this is totally reliant on how it's invested, as well as the markets which are out of your control. Most standard critical yields are 8 or 9 per cent, and Mr Cox suggests these kinds of levels mean the trustees are not being generous with their ETVs. He says: "If a deal has a critical yield of 7 per cent or less we might recommend a transfer, but only if the investor's other circumstances and attitude to risk are suitable."
Could there be something in it for me?
Treading carefully is very important when weighing up a deal, but keeping an open mind is also important. Benjamin Roe, pensions consultant at Aon Hewitt, says high earners are the group that could actually benefit from ETV offers the most - especially if you're in ill health or are single. "They are more likely to have a higher level of financial literacy, be more experienced managing investments and be able to take advantage of the new flexible drawdown rules introduced last year," he says.
Under flexible drawdown, individuals with a 'lifetime income' of at least £20,000 may take unlimited withdrawals from their drawdown funds, provided that the scheme permits it. Sources of income which count towards the new flexible drawdown include guaranteed lifetime income are state pensions, defined benefit schemes, scheme pensions and lifetime annuities .
Another issue to consider is the health of your scheme. For a company going into administration the pension fund would end up under the safety net of the Pension Protection Fund (PPF). However, the second your pension scheme enters the PPF you lose all pension benefits above £30k per year and there’s no way to reverse this. So if you're expecting an annual income of more than £30k and you suspect your company is in a precarious financial state, an ETV might offer you an escape route out of trouble.
But, as James Walsh, head of pensions policy at the National Association of Pension Funds, points out, every case is different. He recommends accepting the free advice you get when you receive your offer as the best way to avoid ending up opting for the wrong deal and losing out while your company reaps the reward.
