What is a defined benefit pension scheme?
These are employer (occupational) pension plans setup by an employer to provide pension and other benefits to employees. In a defined benefit (DB) scheme, the pension income and/or lump sum you get when you retire is related to your final salary and years of service with that employer. For example, you might be entitled to a maximum pension of two-thirds of your salary after 40 years’ service, including the state pension.
Why are DB schemes in the news?
Whilst the benefits of a DB scheme are hugely attractive to employees, the reality is that they are also hugely expensive for employers. Longer life expectancy, tough new regulatory rules, poor investment returns and tax changes have all contributed to put an estimated eight out of ten DB schemes in Ireland in deficit (i.e. they don’t have sufficient assets to cover the benefits they have promised). Many schemes have been wound up and it seems inevitable that many more will follow suit in the near future.
What are your choices if your employer DB scheme is winding up?
If your scheme is winding up you will have a number of options. Depending on your circumstances some or all of the following choices may be available to you:
1. Transfer to a Personal Retirement Bond (PRB). Your benefits will be moved from your old pension scheme to a pension plan controlled by you. PRBs are provided by life and pensions companies and involve a range of investment options.
2. Transfer to the Default Personal Retirement Bond. When a scheme winds up, the trustees are obliged to select a PRB and a fund, which then become the default PRB and default fund for that scheme wind-up. If a member does not decide on their own PRB or if a member is not contactable, the transfer value of their pensions will be moved to the default PRB and default fund.
3. Transfer to a new company pension plan. If the company has set up a new scheme you may be entitled to transfer your existing pension fund to it.
4. Transfer to a Personal Retirement Savings Account (PRSA). This is only an option if you have been a member of the plan for less than fifteen years.
5. Retire early. This option will only apply if you are over the age of 50 and have left the employment of the company.
6. Avail of a trivial payment option. This option may apply if your entitlements from the plan are relatively small. If you qualify you can take the full value of the fund – some of which may be taxable
7. Take a refund of your contributions. This is only available if you have been a member of the scheme for less than two years and if the wind up date has not passed.
Unfortunately it sometimes happens that a scheme may be forced to wind up because it is insolvent – in other words it does not have enough funds to meet its obligations to its members in full. In these circumstances members’ entitlements may well be reduced.
If you are concerned about the state of your defined benefit scheme or receive notice that your DB scheme is winding up, we recommend you always take independent financial advice before making any decision.
MLMG Financial Advisors, St Helens, St Oran’s Road Buncrana, Co. Donegal. Tel +353 (0)74 9321420 / Fax +353 (0)74 9321421/or email: info@mlmg.ie
McLaughlin McGonigle t/a MLMG Financial Advisors is authorised to undertake investment business in Ireland by the Association of Chartered Certified Accountants
