DB Pension - need for an income cash reserve ?

[scotview]

There is an interesting discussion on how much cash to hold, over on the Investment Strategies Board. That post was mainly from an investment perspective so I didn't want to highjack it.

It struck me that in these volatile times, is there a need for an individual to have say the cash equivalent of a years DB income steam set aside ?

Or are DB pensions still regarded as cast iron and will always continue to provide an income stream no matter what.

Thanks.

[mc2fool]

There is an interesting discussion on how much cash to hold, over on the Investment Strategies Board. That post was mainly from an investment perspective so I didn't want to highjack it.

It struck me that in these volatile times, is there a need for an individual to have say the cash equivalent of a years DB income steam set aside ?

Or are DB pensions still regarded as cast iron and will always continue to provide an income stream no matter what.

Thanks.

They are cast iron in the sense that if a DB scheme fails then the Pension Protection Fund takes over and will continue to pay the pension.

https://www.ppf.co.uk/

(I've not explored it in detail so don't know if there are any gotchas....)

[scotview]

They are cast iron in the sense that if a DB scheme fails then the Pension Protection Fund takes over and will continue to pay the pension.

Thanks for the link. I was interested from a private sector DB pension view point.

On a quick skim through, it looks like Local Government DB schemes (funded or unfunded) are not covered, that's interesting.

[ursaminortaur]

They are cast iron in the sense that if a DB scheme fails then the Pension Protection Fund takes over and will continue to pay the pension.

Thanks for the link. I was interested from a private sector DB pension view point.

On a quick skim through, it looks like Local Government DB schemes (funded or unfunded) are not covered, that's interesting.

The Local Government DB scheme is one of the few Public Sector schemes which has a fund most others being Pay as You Go schemes. But the difference between funded and unfunded schemes isn't the reaosn for public sector schemes being excluded from the PPF. The reason for the exclusion is that public sector schemes are backed by an employer who theoretically cannot fail, ie the government, so don't need to be covered by the PPF.

[ursaminortaur]

There is an interesting discussion on how much cash to hold, over on the Investment Strategies Board. That post was mainly from an investment perspective so I didn't want to highjack it.

It struck me that in these volatile times, is there a need for an individual to have say the cash equivalent of a years DB income steam set aside ?

Or are DB pensions still regarded as cast iron and will always continue to provide an income stream no matter what.

Thanks.

They are cast iron in the sense that if a DB scheme fails then the Pension Protection Fund takes over and will continue to pay the pension.

https://www.ppf.co.uk/

(I've not explored it in detail so don't know if there are any gotchas....)

If you are above the NRA for the scheme and are already receiving the pension then you should continue to receive the full pension however if you retired* early or haven't retired and are below the NRA then you will only get 90% of the promised pension and that may be capped.

* If you retired early on health grounds then you may continue to get the full pension.

Pension payments increases will also be limited to the statutory requirements (ie 5% for pensionable service before 5th April 1997 and 2.%% for pensionable service after that date).

https://www.ppf.co.uk/sites/default/files/2020-05/PPF_What%20is%20the%20PPF_Final_v5.pdf

Hence in most cases if you are already receiving the DB pension you would continue to receive the full pension and wouldn't need any extra cash fund set aside - though according to what your scheme promised you might get lower increases in the future.

If you had retired early but not on health grounds and were still below the NRA when the company became insolvent then your pension could be reduced (being reduced to 90% of its promised value and potentially even more if capped). Note however that that would be a permanent reduction rather than the hopefully temporary reduction due to investments having problems in a downturn and hence the holding of extra cash to tide you over wouldn't really solve the problem.

[Kantwebefriends]

"PPF benefit payments will generally rise in line with inflation each year, subject to a maximum of 2.5 per cent. This will only relate to pensionable service after
5 April 1997. Payments relating to pensionable service before that date won’t increase." So says the PPF leaflet.

Suppose my pension scheme fails and I am passed to the PPF. After that I die: what will my widow receive?

[parallellines]

Suppose my pension scheme fails and I am passed to the PPF. After that I die: what will my widow receive?

"If you die after you have retired, an eligible spouse, civil partner or relevant partner will receive half the annual compensation you would be receiving at your date of death."

https://www.ppfmembers.org.uk/en/FAQs/FAQBereavement

That's not necessarily what the pension scheme would have provided, some schemes pay half what your pension would have been if you hadn't exchanged pension for lump sum at retirement.

Also the PPF doesn't provide survivor benefits if the pension scheme provided no survivor benefits

[Kantwebefriends]

Thanks, parallellines. I'd hoped it had improved since last I looked at it.

Another variant. Suppose I die and my widow receives her expected widow's pension. Then my DB scheme passes to the PPF.

Will she continue to get her full pension (it will be nowhere near a cap)? What sort of index-linking would it enjoy?

[parallellines]

She would be treated in the same way as a pensioner who had reached normal pension age; so compensation brought in initially at 100% of the scheme pension she had been receiving, but the same limited inflation protection on post 1997 benefits only.