It was a Pension PlayPen of two halves , when Aon’s Paul Estruch explained latest thinking on bridging pensions and pension increase exchanges to the group yesterday.
A bridging pension is a pension paid on top of the long-term promise to bide over those retiring earlier than state pension age till the state pension cuts in. I am generally in favor of these (and have one myself), they smooth the journey through retirement and provided the amount lost later is offset by bringing forward pension “jam” today, they are good news.
However, as one of us mentioned in chat , it is not enough for a scheme to set this at outset and then forget to remind pensioners of its existence, it needs to be a reminder on every pensioner payslip between the commencement of the pension and the payment of the state pension because people forget, get used to their bridging pension and then get a shock when their pension goes down at retirement.
Much is made of financial education and the need for financial advice, but it is human nature to remember selectively. Pensions are complicated things and bridging pensions, sensible as they are as a means to alleviate pre SPA poverty, can result in some serious disappointment in expectations.
Nonetheless , thanks Paul for reminding us that Defined Benefit schemes can provide this bridging. Reading recent statistics on the state pension gap, from the IFS, we should be thinking about bridging pensions, not as a means of de-risking but as a means of offering fair-value pensions – especially to those retiring on low incomes.
It looks like the cohort with the highest incidence of poverty is the one in the gap between actual retirement and the state retirement age. Whether that retirement is voluntary or as a result of sickness or redundancy, the income gap appears to be very real.
I read very little on bridging pensions and am keen to learn more – thanks Paul
Pies in the sky (sexy cash or scam)
I had thought that the pressure on schemes to improve their funding through pension increase exchange had died away. While bridging pensions have social utility, swapping long term pension increases for an increased immediate pension is seldom a good idea. It really is a “jam today” solution used to get schemes and sponsors out of a funding “jam” with (as Paul pointed out) only 80% of fair value being paid through the immediate uplift.
Few pension schemes are in need of this kind of de-risking right now and in my opinion, they have no place in the de-risking tool-kit. These “exercises” are anything but cheap to implement and rely on a point of sale decision that cannot be reversed and is anything but a win-win to the member who can live with the consequences for decades.
The advisers, such as LEBC, who provided the initial analysis and helped members take decisions, have since been hung out to dry while the architects of these plans sit in plush corporate offices. The analogies with the pushing of illegal narcotics are very evident.
If you want to read about the pros and cons of the PIE decision, read Steve Webb’s excellent article here.It was written in 2018 when pressure on scheme funding was higher than today. I hope that the value of pension increases is talked up not down. The issues surrounding schemes that promised true inflation linking but are delivering statutory minima , show that a pension promise, once made, is counted into financial planning. When inflation is below 2% PIEs looked a good idea, but not today.
I was surprised that the use of a PLA was not explored which could deliver more net cash flow as a result of much of the receipts are regarded as capital this has great flexibility allowing different bridging periods..
What are typical minimum lump sums required to buy a purchased life annuity in the UK or overseas, John?
The problem with bridging pensions is, of course, that they will be seen by many recipents as a cut in their pension at retirement age. What was called “integration” was widespead back in the day, but you can’t really expect non-anoraks to remember the nicities of benefit design, however much it seemed logical at the time. The key, as you say, is adequate communication with both current pensioners and deferred pensioners, which is generally a weak spot for occupational pension schemes. I typically hear from those pensioners complaining about the arrangement.