Deferred members of the Anglo Irish Bank (Now IBRC) Pension scheme(s) are currently being informed that their pensions will be reduced following the decision to wind up the schemes. This is down to Irish retirement rules rather than a decision of the trustees.
And it’s not just ex Anglo employees who will be effected. The rules will affect up to 70,000 private sector employees who have left defined benefit scheme since 2011.
On the wind up of a Defined Benefit Scheme, the trustees will give the members various options as set out by the Pensions Authority and Revenue. In most cases, the trustees will purchase a Buy Out Bond (also known as a Personal Retirement Bond) if the member has not chosen to transfer the benefits to their new employer scheme.
When the funds are transferred into the Buy Out Bonds, some of the old rules of the DB scheme follow into the Bond. Although these Bonds are now defined contribution plans, they do not have the same retirement options as other defined contribution plans.
State rules (Revenue eBrief No. 72/11) mean that the members will be forced to purchase an annuity at retirement. In return for the value of the Bond at the time of retirement annuity provider (insurance company) will give the members an annual income for the rest of their lives. The annuity rates which are linked to Gilt yields and Bond markets as well as longevity are at historic low levels.
There is absolutely no comparison between the promise from the defined benefit scheme and the rate which the members will receive on the open annuity market. That is even before the member tries to factor in a spouses pension.
Even the Pensions Ombudsman, Paul Kenny who has received over 100 complaints from former members of defined benefit schemes, has described the compulsory annuity rule as an “absurd rule that serves no purpose”. He further added that “It locks people into extremely low interest rates for life. In most cases there’s nothing I can do”.
There are alternatives to the annuity purchase if you act before your scheme is wound up. If you are an active member of an occupational scheme, you could transfer the “equivalent transfer value” into your occupational pension scheme. Alternatively you could consider a transfer to a Maltese based pension scheme or a UK based scheme for some alternative retirement options.
A Maltese scheme would allow a retirement based on a lump sum of 30% of the scheme value as opposed to a retirement based on salary and service.
The balance is then a personal retirement asset which can be drawn down as a taxable retirement income (similar to an ARF) and in the event of the death of the member, the residual value can be passed to the members estate.