It is largely the high cost of annuities which continues to bankrupt DB schemes in this country, and it’s a bit Irish that the solution is to evict the members and let them fend for themselves. In effect, they’re being told “we can’t afford to pay the pension we promised, so here’s a lump of money – see what you can do yourself.”
It’s even more Irish that there are two measurements of a pensions schemes solvency; one from the accounting fraternity and one from the Pensions Authority. And they’re not the same, not even close. Many schemes that appear solvent under the artificial minimum finding standards are wholly underwater by reference to the accounting standards.
This dichotomy will ensure a steady stream of DB victims for years to come.
Small self-administered pensions are now providing valuable assistance to this cohort of doomed pension savers. The solutions are provided by members of the Association of Pension Trustees of Ireland.
Replenishing the retirement income that would otherwise have been available is the key objective and there are several solutions that can be adopted to achieve this.
- The pension lump sum can be enhanced.
- We can adopt investment strategies and acquire higher yield investment assets which are inaccessible to group schemes or life company pensions
- We look at the pension saver holistically – we don’t just look at the tax, we look at the tax bills left behind.
- We stay with the pensioner throughout the life of the scheme. Because of the lack of regulation, advisers are allowed to operate in this space for the quick income hit they get when they introduce a client to a life company. We don’t.
Example
Mr Jones, aged 47 was expecting a pension of €20,000 at age 60 from his DB pension. However, the scheme was wound up as insolvent. He got a transfer value of €150,000 – an amount that needed to grow by 12% a year if it had any chance of replacing the annuity. Mr Jones sought help from an APTI member firm.
Their approach in this instance was to leverage on the investment flexibility that one member schemes afford and use the funds to purchase a rental property yielding 6%. So, over the next 10 years an estimated €90,000 in rental income can be stockpiled. If house prices grow at 5% p.a. the capital value of the property will grow to circa €244,000. This leaves the pension saver in a very flexible position in 10 years – he can continue to hold the property, which will then be producing rent (or income for him) of almost €15,000. We can, at that stage, take most of the €90,000 as a pension lump sum and supplement the income. Or he could choose to reinvest the entire fund in a more valuable property that would kick out €20,000 in inflation proofed income (rent).
Most importantly, none of these future decisions need to be taken now – we are simple creating the flexibility now to optimise his position then.
So, while our elected representatives currently are busy – but unsuccessful – trying to prevent DB schemes from shutting down, Mr Jones – and many like him – took shelter from his DB failure with a small self-administered pension. In fact, Mr Jones is probably better off than he would have been had his DB scheme continued.
Jim Connolly