Uh oh, Pension Tension!

There was nearly open revolt at work today over a bombshell announcement made yesterday regarding our pensions.

Ok, I exaggerate, but there were lots of angry clusters of 50-somethings around the coffee machines! Working in the private sector, we can’t down our tools, although perhaps someone might have thrown their mouse across their desk in disgust!

I mentioned over on the Early Retirement Guys Forum that HR had just confirmed the penalty for taking our defined benefit (DB) pensions early – Cerridwen called it very punitive – the whole truth is worse.

Pension Scenario Today

According to my pension paperwork (which I dug out last night), since I joined the plan before 2005, my Normal Retirement Age (NRA) in the plan is 60 (not 65, which I mistakenly believed). 

The earliest I can take this is at age 55 and the penalty is 4% per year, so if I were to take my pension early at 55, I would take a 20% hit on my pension.

Pension Scenario after Company Sale


I’ve mentioned previously that the company I work for is being sold by our parent company and we’ve now been told that this will happen at the end of October, when our new  owners finally sign on the dotted line.

With pretty much just one month to go, HR sent a ‘timely’ email in answer to people asking questions about the pension scheme.
Post 31st October 2015, NRA will increase to 65 for everyone, regardless of when you joined the scheme and the penalty for taking the pension early will be increased to 8% per year!
Oh dear…


So now, if I wanted to take my DB pension at 55, my pension would be reduced by a whopping 80%! Even to take it 5 years later at 60 means a reduction of 40% – ouch!

I get how if someone leaves the business voluntarily to work for another company, they lose some pension rights. However, none of us are leaving the scheme by choice so this leaves a very bad taste in the mouth.

Something tells me that the company knew about this all along but have only mentioned it now, with just one month to go before the sale, having kept us all beavering away for the past 5 months under the guise of ‘Business As Usual!’ Certainly not business as usual when it came to our pension schemes!

My Plans

Since I mistakenly thought that my NRA was 65, I wasn’t planning on taking it before then (maybe 64 at the earliest). Therefore, my own plans for FI/Early retirement remain unchanged – I continue to save and invest to accumulate a pot of money on top of my DB pension.

I believe an official complaint has been submitted to the senior leadership team – unlikely to do any good with only one month to go but better than doing nothing.

Business As Usual

When I happened to look around the office today, I saw very little work going on as nearly everyone was unhappily talking about pensions.  Many people evidently had planned on taking their pensions well before NRA (including my boss and two other chaps I work with) and they were extremely unhappy and understandably upset.
Me – I just got on with my work as I’ve still got a job to do.
Of course I’m not happy with the changes made but perhaps I’m not as upset as I could be because I have got my own plans.

36 thoughts on “Uh oh, Pension Tension!

  1. As soon as your new owners get their hands on the company the defined benefit pension scheme will be closed and there will be a high level of redundancies. As I remember it was a venture capital firm that bought the company

  2. Hi Weenie,
    Thats really disappointing from the company, and really doesnt reflect well on them, but it does highlight the danger of relying on only one thing for your retirement, so good that you are well in hand with your freedom fund as well so it wont impact you! Keeping ploughing on with the job will also reflect well, so keep going with the plans!
    London Rob

  3. Hi Weenie

    This sort of thing really makes my blood boil, I understand that companies need to be able to change how they spend their money and how much, but it is the retrospective aspect of the changes that is my issue.

    Someone could have been paying in to the pension for 40 years on the original basis, and then all of a sudden they change the rules, and your calculations are all to pot!!

    Why doesn't the government make it illegal to retrospectively make changes to pensions that are reducing the benefit (after all I believe a pension scheme is a contract). On this basis your company would stop paying into the one with 4% reduction and freeze the position, and start a new scheme with the 8%reduction so at least your position hasn't deteriorated for the money paid in over the last many years.

    Luckily for you, you have option as you are making your own plans in addition to the company pension unlike people who have totally relied on the company pension. (the words eggs and one basket spring to mind).

    Best Wishes
    FI UK

    Best Wishes

  4. That's nuts!

    Presumably you will be required to agree to the new pension provisions, though I'm guessing that will be a condition of continued employment?? The 80% seems completely disgraceful, it certainly seems excessive. Is the 8% a year a "rule of thumb" they have provided to quickly work out potential reductions? It's all calculated on actuarial tables as far as I know so there is the possibility that some tapering may come into play at some point?

    Got my fingers crossed for you Weenie and don't give up without a fight if they're trying to pull a fast one on you guys.

  5. You're SO lucky, or is that sensible, to have your own plans in addition to the scheme. I can imagine how angry people must be feeling right now, especially if they were late 50 and hoping to retire soon!

    All the more reason we should all be working on our own FIRE/FU funds as soon as we can. There is, unfortunately, not much safety in company pensions. They can be the downfall of many a big company, or least be an enormous liability which drags on the company like a ball and chain. I'm thinking of course of those large FTSE100 companies with mega pension deficits e.g. BAE Systems, Sainsbury's, et al. who could do with shoring things up in that department.

    I guess that's what your new company is trying to ensure?

    I would say best of luck with it all, but you're on the right track anyway, and I guess you're in a similar position to Cerridwen, in that if you did want to retire early, you are looking at the difference between quitting work and when your pensions kick in…

    Cheers

  6. Hi weenie,

    It seems incredible that they can apply new rules retrospectively to your existing pension. Sure, our pension terms and conditions have changed since our scheme was revised in 2014, but the new rules (career average rather than final salary and a slightly higher actuarial reduction – but nothing like your 8%!) are only applied to any pension we build up post-2014.

    Therefore although the NRA of our scheme has moved up in line with state pension retirement age (66 for me) I can still take the pension built up pre-2014 at the NRA that was in place then – ie 65. That's not a big deal for me as there's only a year's difference but are you sure the same kind of setup doesn't apply in your case?

    I don't suppose there's any such thing as trade union representation in your organisation to help out with questions, communication and a collective formal grievance?

  7. > Post 31st October 2015, NRA will increase to 65 for everyone, regardless of when you joined the scheme and the penalty for taking the pension early will be increased to 8% per year!

    They may say that, but I don't think they can make that stick for pension already accrued. That is part of your contract of employment and is effectively deferred pay. It is protected by law

    https://www.barnett-waddingham.co.uk/finance-directors-guide-pensions/benefit-redesign-and-closure-accrual/

    They can change the level of the actuarial reduction, but if you worked for, say 10 years under the old scheme with an NRA of 60 and an accrual of FS x years/60 then you are entitled to get FS x 1/6 provided you draw that pension at 60, no ifs no buts.

    What they can do is ramp the actuarial reduction, and what they can also do is make future accrual with an NRA of 65 (and change the accrual rate) and specify you must take both old and new parts at the same time, which is a big disincentive to drawing the old part at 60, because the new part gets massively actuarially reduced due to the later NRA. That may not matter that much in Neverland's scenario where there won't be much new accrual. But I don't think they can take your existing contractually accrued benefits and devalue them by 40% (8% AR times (new NRA of 65 – 60)) if you draw the pension at 60 as originally contracted.

  8. It does sound like there may be some solid legal challenges. My understanding was they mayn't cut the benefits already accrued without the agreement of all the people who would lose out, and they need to give you three months' notice of the change. [Not a lawyer, but my company went through this last year]. The other thing to suggest to the people up in arms is that they ask for a copy of the pension trust deeds. Sometimes these are more generous than the legal requirements, and need to be complied with unless they are wrapping up the scheme entirely. Good luck and good work on not depending on a single scheme.

  9. Hi Cerridwen
    When we get sold, our DB pensions will get frozen, ie we will no longer be able to pay into them but as you say, these changes will apply to our existing pension.

    We have Employee representations who are collecting questions and both our MD and our lawyer are on the case (both are in their early 50s so will be affected).

  10. Hi FIUK
    We do have guys who have worked at the company for 40 years and it's turned into a nightmare for them!
    It's the two changes that make it worse, ie the increase in NRA and increase to 8% – even just one of them would be bad enough but we've not been given any notice of this whatsoever.

    I am glad that I started making my own plans – I think I'd be feeling a bit sick if I hadn't!

    Thanks for the kind wishes.

  11. Hi M
    I actually read the pension guff that gets posted out every year and there is a pension deficit but it's been reducing year on year, especially when they hiked up everyone's pension contributions a few years back.

    The new company will be providing their own DC pension as a minimum but we have no info on that yet – these changes are only to our current pension under the current parent company.

    Thanks and you're right – the money I'm accumulating now is just to see me through until I can begin to draw my DB and state pensions. All the more incentive now to really work on getting my numbers!

  12. Hi FIb
    Any new pension provisions will be under our new owner, post 31st October. Although my employment will be classed as continuous, that's unlikely to have any positive effect on my new pension.
    We have no idea where they plucked the 8% from as it's not in any of our pension paperwork, nor on the company pension website. We have got senior people/lawyer looking into what we can do, if there is anything to be done.
    Thanks, we won't let them just get away with it and in fact, someone has let the news filter to our sister companies warning them of what is happening so there are rumblings in our other offices!

  13. Hi London Rob
    Yes, it is very disappointing – we're all sad that we're being sold off but now, people are angry.
    Keeping plugging away at the job keeps my mind off it, otherwise I too would just get angry!
    Thanks for stopping by!

  14. Hi Neverland

    Yes, our DB pensions will be frozen from 31st Oct. Redundancies are inevitable, we've already been told how our redundancy pay will be calculated should we be among the ones to go.

    It's our US counterparts that have been bought out by a venture capital firm – our new owners are owned by a French bank.

  15. Hi Emma
    We've got people looking at the pension trust deeds now, to see if there's anything that can be done. Certainly we didn't get 3 months' notice of these changes. Fingers crossed something positive is found but I'm not holding on for too much hope.
    Thanks for support and for stopping by.

  16. Thanks for the link, ermine – have forwarded onto on the guys looking into this.

    I'm hoping that HR have made a big mistake when they sent that info out – it does all seem unbelievable that they can just devalue benefits that have been accrued.

    Here's hoping!

    Thanks for your help and support.

  17. Infuriating! I don't have much to do with DB pension schemes in my work… but strikes me a wholly unfair to target past accrual.

    At least you don't have all your retirement eggs in the one pot and are more flexible than most.

    MrZ

  18. Wow…that is a big deal!!

    You can also contact the Pension Advisory Service (TPAS) and the Pensions Regulator. The regulator can fine them for not following process – not that that will help with the impact on the changes to the rules. But it will make them think about what they are doing!

    I remember when I was working for one employer, they changed the pension rules and increased the NRA to 65 from 60 and increased the %rate deducted so that you would lose out big time if you wanted to retire before 65. ( I can't remember the %s but they could very well have been similar to those you quote).
    I cannot remember the full details now but I do know that a whole load of employees aged between 55 and 60 immediately got their calculators out and determined if they should immediate claim their pension. I think we were given the 3 months minimum notice. So a whole load of people retired quickly so they could get their pension under the old rules.

    At my last place we had a big pension mess due to its sale. The parent company was a FTSE100 company with a good pension scheme. The parent sold us, which immediately froze the pension and if you had not had 2 years service, you were immediately ejected from the scheme and given your contributions back or you could take the transfer value (which was 1/3 of its original value due to these silly actuary charges – but more than your contributions value) – oh ! and you had a time limit – you had to move your money within 3 months or they would default to sending you a cheque for your contribution value only.

    The new owner didn't have a pension scheme – they kept saying they would honour contributions when they did and back date the employer contributions – but the scheme never appeared until we had cease working for the new company (we were made redundant by the new owner!!). We got the pension regulator onto them and they were under threat of fines if they did not provide a scheme. So they eventually opened a scheme (They had 6 weeks to provide one during a company sale transition) and it took over 4 months to get them to pay the monies owed into it! It was at their new pension rates which was 1% !!!! When our old scheme paid in 4%!
    With all this mess, I quickly transferred the poor 1/3 value into my personal pension and waited out for the new one to appear. I upped my contributions to my personal scheme to cover the gap. The parent company was told to extend the time limits so that employees could transfer their money to the new scheme when it was finally in place.
    It was basically a mess and I was so glad I had a personal pension scheme, if I hadn't I would have lost out on growth and value over the 6 month period that this issue rumbled on.

    Good luck and I hope the lawyer is able to help and fight this. It appears that pensions are exempt from TUPE and during company sales anything can happen to the pension as you become a new member of the new owners scheme and fall under their rules which are normally poorer than the original one. Your old one becomes deferred and you lose all your nice benefits.

  19. That is a really scary story, Weenie, and underlines many worries about the whole pensions industry. Are company pension schemes our money or not? And when do pensions actually become our money? There might be definitive answers to these questions but I don't know them, and I have a vested interest in picking up one of my company pensions at 55! Something for me to look into, thanks for posting.

  20. I think the Ermine is on the right lines. Your lawyers will no doubt be well versed in s67 of the Pensions Act 1995, but you might want to look at this yourself:

    http://www.legislation.gov.uk/ukpga/1995/26/section/67/enacted

    In a nutshell, this restricts the right to reduce pension entitlements previously accrued up to the date of the change, without member consent. I would have thought an increase in NRA might fall under this category as it is effectively the accrual rate for each year of service.that your employer is now looking to change.

  21. Hey Mr Z
    I just feel really sorry for the people who have worked for over 30 years for the business and are in their mid-50s now.
    I've still got some time to go to save/invest and yeah, really glad I've got some other eggs in baskets too!

  22. Hi sparklebee

    Our people are on the case to see if all processes were followed and the trust deeds/rules are being looked at too. I just hope they find something….

    I know the 'value' of our DB pensions will be frozen when we get sold. As they stopped new starters from joining the DB pension (they could only join the DC one), people who have DB pensions have worked for the business for a minimum of 5 years. Average tenure at our business is 10 years, so there's a lot of unhappy folk.

    I hope we don't end up in your situation where the new owner doesn't have a pension scheme…they must have as they're a bigger company than us?

    The lawyer wasn't in today so we're all hoping it was because he was busy looking into the situation.

    Thanks for stopping by.

  23. Hi bestace
    Since our lawyer is one of the ones badly affected (he's 54 years old, been in the business over 15 years), he'll be sure to be doing his most to extract all info from the Pensions Act that will help us.
    Thanks for that link and for stopping by.

  24. Well, it sounds like the from subsequent comments that your company has either sent out gross misinformation or are acting illegally!!!

    I'm not sure what's worse really because if it is really "just" that the changes only apply from pension accrued from now on, they have p!ssed off a hell of a lot of people unnecessarily, which is just shambolic.

    Either way it is a another great example of why financial security on your own terms is such a great idea.

    Good luck for the rest of your coworkers!

  25. I think a lot of posters are laboring under a false assumption. Even a 15% employee contribution doesn't fund more half the cost of a 1/40th salary defined benefit index linked average salary scheme accessible at 65. In reality these schemes cost about 30% of salary now because of low gilt yields and longer lifetimes. In most companies that still have defined benefit schemes you have employees working side by side doing the same jobs where one employee is getting a pension benefit of 4-8% of salary from the employer on a defined contribution scheme and another employee is getting a benefit of about 20% of salary on a now closed to new entrants defined benefit scheme. Its not really surprising that companies are acting to close that gap to improve their shareholders returns. In fact in most cases their shareholders are…..other people's pension schemes. Most people remaining in defined benefit pension schemes just benefited from being in the right place at the right time and I can completely see the argument for equalising benefits

  26. Yep, I currently work side by side with people on DC schemes because the DB one was pulled for new starters around 5-6 years ago. There are some people I work with who were on the original non-contributory DB scheme and they only started contributing around 5-6 years ago, so had 20+ of not having to contribute to their own pension schemes! But at the moment, they're in the same boat as the rest of us, eg big penalty for taking their pensions early.

    I know I'm lucky to have been on a DB scheme at all, working in the private sector meh, it's still come as a shock to us.

  27. Hi TFS
    Our pension providers will be visiting our offices next week to answer questions. I'm not too optimistic right now but we'll see what gets revealed.
    I am so glad I'm wasn't planning on just relying on the DB pension!

  28. Pension, social security, etc. It's all a joke. Gone are the days when one could retire with a pension and live a decent life. These days it's all about taking care of yourself by accumulating as many income producing assets as possible. Delayed retirement, pension decreases or whatever become meaningless once you realize you not dependent on that as a source of income.

  29. This LSE research paper is about a decade old but illustrates some home truths about defined benefit pensions:

    – they are a historical aberration flowering from the 1960s to 1980s
    – until government legislation was introduced the obligations on companies to pay increasing pensions to pensioners was pretty weak so they didn't actually cost companies much in times of much higher inflation than now
    – as soon as governments introduced extra obligations and costs on companies the companies started closing down their defined benefit schemes; first to new joiners; and then to everybody

    http://www.lse.ac.uk/management/documents/A_Recent_History_of_UK_Defined_Benefit_Pension_Provision_and_Management.pdf

    The norm has always been, to the extent people could retire, they had to fund it themselves

    There is no magic money tree

  30. Hi Neverland
    There certainly is no magic money tree. One good thing that has come out of this mess is that some of the younger folk have mentioned looking into saving outside of company pension schemes. Of course, whether they do actually do so or not is debatable but at least it's making them think.
    Thanks for stopping by.

  31. Sorry to hear about the excessive tinkering to your DB pension scheme. I hope the result isn't as bad as the worst case scenario you presented, keep us updated. I have similar fears for my private sector DB scheme and am contributing at the highest rate of 35ths before the music stops.. Anyone who isn't doing that is either minted or mad. My scheme NRA is 65 anyway, 3% reduction for retirement or redundancy, 5%+ (terms are vague/whatever they fancy) for leavers. I'm planning to take mine at a 30% reduction at 55, in a take the money and run heist, assuming the terms are still the same then, which is optimistic at best. Really.

  32. Thanks for stopping by Starla. 30% I think, if you consider other savings/investments is doable but for me to take mine at 55, it'll be 80%…not doable!

    I'm attending a Q & A session this week, so some more light should be shed on the matter but I don't have high hopes.

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