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In the UK the law was changed such that people were given the freedom to transfer out of their defined benefit schemes, and most were paid handsome lump sums f

by nly 5y ago

In the UK the law was changed such that people were given the freedom to transfer out of their defined benefit schemes, and most were paid handsome lump sums for doing so because the schemes were desperately underfunded and wanted people out

sokoloff 5y ago
How does paying a handsome lump sum to leavers help make them less underfunded? If the handsome amount is less than the value of the pension, rational people would leave it in there. If it’s more than the current value of the pension, rational people would take it out and the pension fund is thereby left worse off, right?
- nly 5y ago
  The guarantee on these schemes was on the fixed retirement income, which means as interest rates fell the present day value actually shot up. I don't think these companies had a choice in the matter. Lots of people cashed out because they feared their pension scheme would collapse. It should be noted that transfering out of these schemes is expensive because you're forced to take advice from an IFA
- lostcolony 5y ago
  Just guessing, but, lump sum may be more than the current amount that the person has contributed, but less than what the pension guarantees but may not be able to attain. That is, person may have put in 100k; and a payout is 150k. That seems like a loss, except the pension may also be built around assumptions of 7% growth in that 100k per year; in reality it may be seeing only 3% growth. Better to get it off the books than have to service it in 30 years. And for the individual, better to get more and be able to invest it elsewhere, than to risk it in a pension that may go under or otherwise be unable to meet the level of return you expect. So, win/win.
  - ghaff 5y ago
    Defined benefit were typically paid in by the company. That's the thing that makes them attractive. As an employee you do nothing and, when you retire, you potentially get a nice check every month. I've known people I worked with in a past life who had even totally forgotten about the benefit. But you're probably basically correct. It's a lump sum that's likely a significant payout but less than the computed actuarial value that would have to be paid out.
- throwaway98797 5y ago
  Rationality is in the eyes of the beholder.

by nly 5y ago

sokoloff 5y ago

How does paying a handsome lump sum to leavers help make them less underfunded? If the handsome amount is less than the value of the pension, rational people would leave it in there. If it’s more than the current value of the pension, rational people would take it out and the pension fund is thereby left worse off, right?

nly 5y ago
The guarantee on these schemes was on the fixed retirement income, which means as interest rates fell the present day value actually shot up. I don't think these companies had a choice in the matter. Lots of people cashed out because they feared their pension scheme would collapse. It should be noted that transfering out of these schemes is expensive because you're forced to take advice from an IFA
lostcolony 5y ago
Just guessing, but, lump sum may be more than the current amount that the person has contributed, but less than what the pension guarantees but may not be able to attain. That is, person may have put in 100k; and a payout is 150k. That seems like a loss, except the pension may also be built around assumptions of 7% growth in that 100k per year; in reality it may be seeing only 3% growth. Better to get it off the books than have to service it in 30 years. And for the individual, better to get more and be able to invest it elsewhere, than to risk it in a pension that may go under or otherwise be unable to meet the level of return you expect. So, win/win.
- ghaff 5y ago
  Defined benefit were typically paid in by the company. That's the thing that makes them attractive. As an employee you do nothing and, when you retire, you potentially get a nice check every month. I've known people I worked with in a past life who had even totally forgotten about the benefit. But you're probably basically correct. It's a lump sum that's likely a significant payout but less than the computed actuarial value that would have to be paid out.
throwaway98797 5y ago
Rationality is in the eyes of the beholder.