As so many of us know, Defined Benefit pension schemes are quickly disappearing in the private sector in Ireland. At one stage, it was estimated that there was 2,500 such schemes in Ireland. This is now down to around 800.
The reasons for the demise are usually one of two; where there is a substantial underfunding issue (meaning that there isn’t, and never will be, enough money in the pot to pay everyone) – this was the case in permanent tsb; the second scenario is where the company itself ceases trading, as was the case with Lufthansa Technik Airmotive Ireland in Rathcoole.
We have spoken in previous blogs about how the writing had been on the wall for a long time for many of these schemes. We are all simply living a lot longer so there is not enough in the pension scheme to fund all members for the rest of their long lives. To avoid the underfunding situation, contributors would need to have been making increased contributions starting many years ago to meet the inevitable deficit.
Where the company is ceasing trading, there is the double-whammy of losing a job.
Here is my four-step strategy for dealing with the news that your DB scheme is being wound up:
Step one: acceptance
From having dealt with other similar situations in the past, I think the hardest part for members of these schemes is accepting that the promised guaranteed income for life is no more. The next hardest thing is the realisation that they themselves now have to take control of their pension fund.
The best thing you can do is forget about the promised pension for life – read our blog here called ‘No use crying over spilt milk’. If your Defined Benefit pension scheme is being wound up, focus on the fund you have to work on now, and what you need to do with that fund to generate the income in retirement you will actually need.
Step two: goal setting
If one positive can be taken from this, it is that it really does give you the opportunity to focus on what your goals and aspirations are; where do you see yourself in 5, 10 or 15 years’ time? Let’s face it, you never had to think about the ‘big picture’ when you knew you were guaranteed half or two-thirds of your income at retirement for the rest of your days, so grasp the opportunity now to put some goals in place.
Think about the lifestyle you aspire to in retirement. Do you want to be debt free? Do you intend to remain in your current home? Do you dream about that cosy gîte in the south of France? Taking all this into consideration, along with an analysis of your current lifestyle expenses, we can establish the level of income you will need in retirement. And from this, we will be able to identify the fund required to generate this level of income. The question for you – and your financial adviser – is: will it be possible to grow your transfer fund to this target fund in the timeframe you have? If not, you may have to adjust your expectations slightly. Or take on a higher level of risk, and you may not have the capacity for that – but more on that later.
“It’s exactly the same goal-driven approach we at The Money Advisers take with investment – what return does your investment need to make so that you can achieve your lifestyle goals and objectives? At the end of the day, a pension is a long-term investment.”
Step three: risk assessment
We are usually asked “Where is the best place to invest my transfer fund?” But, as I have just explained, this is the last link in the chain.
Risk and return are totally interlinked; the higher the risk, the higher the potential return. But how much risk do you need to take? There are three elements to risk; your attitude to risk, your capacity for risk and your requirement for risk.
None of us like to lose money, so we can safely say we have a low tolerance for risk (that’s your attitude). But if you have more than ten years to retirement, or intend to place your money in an ARF (Approved Retirement Fund) at retirement, you actually have a long time horizon – we would say you have a high capacity for risk – you can actually afford to lose money in the short term, for potential higher long term gains because you have time to make it again. The requirement for risk – how much risk you need to take – depends on the level of growth you need from your investment to achieve your target fund at retirement.
If you want to know more about risk, read more here.
Our job is to design an investment strategy that will meet your goals taking into account the risk factors outlined above. Of course you may have other assets that will form part of your retirement fund, such as other investment funds, property, shares and so on. We factor these into the equation too.
Step four: what to do with your balance
So you see that the question you thought was the most important one actually comes after you’ve thought about some other fundamental things. Only then come the so-called technical decisions you need to make at the winding up of a DB scheme. I have outlined them in this previous blog ‘Options for members of winding up defined benefit pension schemes’.
What we can do for you
We in The Money Advisers are here to help. If you have any questions, drop us a line, we’d be delighted to help.