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Money purchase underpin

Including Financial Independence and Retiring Early (FIRE)
UrbanAchiever
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Money purchase underpin

#493218

Postby UrbanAchiever » April 9th, 2022, 11:09 pm

Hi, I'm pretty well versed in how DC pensions work but I've turned my attention to a non-public sector DB scheme I was in for the first 7 years of my working life.

My statement of leaving benefits in 2002 outlines the following ( I started working there in 1995):

Post April 5,1998 GMP = £91 pa
Excess Portion (Fixed Addition) = £446 pa
Balance of Formula Pension (pre April 6, 1997) = £480 pa
Balance of post April 5, 1997 Formula Pension = £3240 pa
Total = £4258 pa.

However underneath this it says my money purchase underpin is £7134. And the notes say if the first section of numbers is lower than the underpin (after RPI increases), then I'll get the underpin figure at retirement (age 65 for this scheme).

So seems like I'm guaranteed a max of £7134 pa.

Is that right?

However, when I requested a transfer value in 2016, the letter did not mention the money purchase underpin. And only says that my deferred pension will be worth £4128 pa. If I leave it where it is.

Does that mean my money purchase underpin has been "removed" or, being a cynic, are they only quoting the lower number in an effort to encourage me to transfer out?

The transfer value offered in 2016 was £146k.

I've chosen to leave the pension where it is given the guaranteed nature of it, but I wonder if anyone has a view on the transfer value? I acknowledge the value on offer may be quite different now we are 6 years on from that offer though.

Thanks in advance.

tjh290633
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Re: Money purchase underpin

#493286

Postby tjh290633 » April 10th, 2022, 12:16 pm

UrbanAchiever wrote:However, when I requested a transfer value in 2016, the letter did not mention the money purchase underpin. And only says that my deferred pension will be worth £4128 pa. If I leave it where it is.

Does that mean my money purchase underpin has been "removed" or, being a cynic, are they only quoting the lower number in an effort to encourage me to transfer out?

The fact that the deferred pension quoted is less than the figure quoted at leaving looks very odd to me. The GMP will have increased, if nothing else.

I have never come across this "Underpin" before, which was presumably set at that point in time. Do you have a copy of the pension scheme rules? Is your deferred pension subject to increases, relative to inflation or other matters? That GMP looks very low, even for 7 years. My GMP is that per week. Admittedly I had 20 years of SERPs until 1998 and was contracted-in from 1990 onwards, but it looks fishy to me. The figure after 20 years in 1998 was £83.60 per week, when the upper threshold was £485/wk, it was £440/wk in 1995 and in 2002 in was £585/wk. The lower threshold was £58/wk in 1995 and £75/wk in 2002. You were entitled to 20% of your best 20 years, but you only had 7 years, so maybe you can calculate what that would be.

TJH

ursaminortaur
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Re: Money purchase underpin

#493335

Postby ursaminortaur » April 10th, 2022, 1:42 pm

tjh290633 wrote:
UrbanAchiever wrote:However, when I requested a transfer value in 2016, the letter did not mention the money purchase underpin. And only says that my deferred pension will be worth £4128 pa. If I leave it where it is.

Does that mean my money purchase underpin has been "removed" or, being a cynic, are they only quoting the lower number in an effort to encourage me to transfer out?

The fact that the deferred pension quoted is less than the figure quoted at leaving looks very odd to me. The GMP will have increased, if nothing else.

I have never come across this "Underpin" before, which was presumably set at that point in time. Do you have a copy of the pension scheme rules? Is your deferred pension subject to increases, relative to inflation or other matters? That GMP looks very low, even for 7 years. My GMP is that per week. Admittedly I had 20 years of SERPs until 1998 and was contracted-in from 1990 onwards, but it looks fishy to me. The figure after 20 years in 1998 was £83.60 per week, when the upper threshold was £485/wk, it was £440/wk in 1995 and in 2002 in was £585/wk. The lower threshold was £58/wk in 1995 and £75/wk in 2002. You were entitled to 20% of your best 20 years, but you only had 7 years, so maybe you can calculate what that would be.

TJH


It looks like "underpins" are part of a hybrid DC/DB arrangement.

https://helpfiles.thepensionsregulator.gov.uk/members/hybriddetails/

Underpin

Does the scheme have an underpin?
A scheme with an underpin is one where the benefit payable is calculated as the greater of two alternatives, typically the higher of a DB or DC benefit.

Selection of underpin types:-

A DB section with a DC underpin
The benefits payable are the higher of (i) the DB benefits calculated using the scheme’s normal benefit formula (for example 60ths or 80ths) and (ii) an alternative calculation which is on a DC basis, where contributions are invested in DC funds.

A DB section with a notional DC underpin
A notional underpin is a 'what if' calculation. For example, the scheme may offer to give the member the greater of a DB benefit (e.g. 1/80th) or the annuity that could be purchased with the fund. To work out the DC comparison the scheme would calculate at retirement the value of the member and employer contributions, assuming they increased in line with a specific index or other formula, and then purchase an annuity using agreed rates. The key distinction from the DC underpin in the previous question is that the DC benefits are notional and not based on actual investments.

A DC section with a contracted out underpin on a DB basis
A scheme which will pay a member the greater of (i) the annuity that could be bought with their DC pot and (ii) their DB contracted out benefit (GMP for benefits accrued before 6 April 1997 or Section 9(2b) rights for benefits accrued after 5 April 1997).

A DC section with a contracted in DB underpin
The benefits payable are the greater of (i) the annuity that could be bought with their DC pot and (ii) an alternative calculation on a DB basis (for example 60ths or 80ths) but is not generated from contracting out.

Dod101
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Re: Money purchase underpin

#493341

Postby Dod101 » April 10th, 2022, 2:23 pm

Who is funding the underpin? If it is not the DB pension fund trustees then they will only be quoting a figure to you based on the pension that they are liable for, £4258. The underpin amount would then be presumably a separate issue.

Which of the four examples you quoted applies to you? If the DC scheme actually exists then you would surely get that as well. If it is notional I do not have any idea how that would work, but surely a letter to the pension fund trustees should be able to clarify the point?

Dod

ursaminortaur
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Re: Money purchase underpin

#493369

Postby ursaminortaur » April 10th, 2022, 4:34 pm

Dod101 wrote:Who is funding the underpin? If it is not the DB pension fund trustees then they will only be quoting a figure to you based on the pension that they are liable for, £4258. The underpin amount would then be presumably a separate issue.

Which of the four examples you quoted applies to you? If the DC scheme actually exists then you would surely get that as well. If it is notional I do not have any idea how that would work, but surely a letter to the pension fund trustees should be able to clarify the point?

Dod


The individual's DC scheme fund would along with all the DC scheme funds for the other members be combined as the DB fund. It is just different ways of looking at the same fund which itself is funded from employee and employer contributions together with investment growth. The advantage over a pure DC fund is that in order to cover the guaranteed payments associated with the DB view the employer would be under an obligation to make additional employer contributions to that fund to cover any shortfall.

Hariseldon58
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Re: Money purchase underpin

#493376

Postby Hariseldon58 » April 10th, 2022, 5:01 pm

It would be interesting to seek a transfer value, might be more informative this time and you could enquire further on receipt of a new transfer value for clarification.

Must admit I would have taken the money in 2016 ! I did take the money in 2014, proportionally similar figures for a slightly smaller annual pension.

I am guessing I am a little older if you started your firsts job in 1995, then the transfer value sounds very generous and perhaps the other aspects of the pension have been accounted for. (My DB pension would have commenced at 60 in 2018)

UrbanAchiever
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Re: Money purchase underpin

#493622

Postby UrbanAchiever » April 11th, 2022, 8:10 pm

I have never come across this "Underpin" before, which was presumably set at that point in time. Do you have a copy of the pension scheme rules? Is your deferred pension subject to increases, relative to inflation or other matters? That GMP looks very low, even for 7 years. My GMP is that per week. Admittedly I had 20 years of SERPs until 1998 and was contracted-in from 1990 onwards, but it looks fishy to me. The figure after 20 years in 1998 was £83.60 per week, when the upper threshold was £485/wk, it was £440/wk in 1995 and in 2002 in was £585/wk. The lower threshold was £58/wk in 1995 and £75/wk in 2002. You were entitled to 20% of your best 20 years, but you only had 7 years, so maybe you can calculate what that would be.


I have the Scheme Handbook, but it makes no mention of the Money Purchase Underpin (MPU). I'll request a copy of the scheme rules from the pension scheme.

My deferred pension is subject to increases:
The Excess Portion (Fixed Addition) is not subject to revaluation, however:
Both Formula Pensions (pre April 97 and post) will be increased in line with the cumulative calendar year RPI increase between the date I left the scheme and my normal retirement date, up to a max of 5%.

I have no idea about GMP, so don't know if this is right or not. I joined the company in Oct 95 and joined the pension scheme in April 96. Not sure if those timings make a difference?

It looks like "underpins" are part of a hybrid DC/DB arrangement.

https://helpfiles.thepensionsregulator. ... iddetails/

Thanks for the info.


This is what my leaving statement says:
On retirement, the value of the post April 5, 1997 pension will be compared with the value of the MPU. If the MPU provides a higher benefit, this higher benefit will be paid and added to the value of the pre April 6, 1997 benefits. So this actually gives a total figure of £8,151, being £7134 (MPU) + £480.80 + £446.67 + £91.

Further notes regarding the MPU state:
"In respect of your service from April 6, 1997, the Scheme contracted out of SERPS by means of the Protected Rights Test. Your own MPU account, which includes Protected Rights (of £2,881) will remain invested in the Scheme and will receive investment returns until you retire, die or transfer benefits out of the Fund. At that time, if your MPU will provide a higher pension than your post-April 5, 1997 formula pension, this higher benefit will be paid. You will be informed of the effect of your MPU, if any, when your benefits become payable."

The individual's DC scheme fund would along with all the DC scheme funds for the other members be combined as the DB fund. It is just different ways of looking at the same fund which itself is funded from employee and employer contributions together with investment growth. The advantage over a pure DC fund is that in order to cover the guaranteed payments associated with the DB view the employer would be under an obligation to make additional employer contributions to that fund to cover any shortfall.


Thanks, that's what I thought.

It would be interesting to seek a transfer value, might be more informative this time and you could enquire further on receipt of a new transfer value for clarification.

Must admit I would have taken the money in 2016 ! I did take the money in 2014, proportionally similar figures for a slightly smaller annual pension.

I am guessing I am a little older if you started your firsts job in 1995, then the transfer value sounds very generous and perhaps the other aspects of the pension have been accounted for. (My DB pension would have commenced at 60 in 2018)


I think I need to contact them to establish for sure what income in retirement it will bring me. I also need to get a copy of the scheme rules. And an updated transfer value. I like the idea of having a small part of my pension at a fixed rate, but on the other hand the normal retirement age for this scheme is 65, and given I plan on retiring at between 53 and 55, I'd like to get my hands on it sooner. The handbook suggests that I need at least 10 years company service to draw it earlier, however I only did 7 years with them.

Many thanks for your comments everyone.

Alaric
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Re: Money purchase underpin

#493624

Postby Alaric » April 11th, 2022, 8:20 pm

UrbanAchiever wrote: given I plan on retiring at between 53 and 55, I'd like to get my hands on it sooner.


You may be thwarted by rukes that say you cannot take benefits more than ten years before the State ewtirement age, That would mean age 57. Bothing to stop anyone ceasing work and living off non0pension assets though.

UrbanAchiever
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Re: Money purchase underpin

#493635

Postby UrbanAchiever » April 11th, 2022, 9:22 pm

Alaric wrote:
UrbanAchiever wrote: given I plan on retiring at between 53 and 55, I'd like to get my hands on it sooner.


You may be thwarted by rukes that say you cannot take benefits more than ten years before the State ewtirement age, That would mean age 57. Bothing to stop anyone ceasing work and living off non0pension assets though.


Yes, I have other non-pension assets that will bridge the gap between stopping work and 57 pension access. But ideally don't want to wait until I'm 65 to access this DB pot.

UrbanAchiever
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Re: Money purchase underpin

#494038

Postby UrbanAchiever » April 13th, 2022, 3:57 pm

Just come off the phone from Mercer who administer the scheme. I had around 12 questions to ask. The lady was incapable of answering any of them apart from one, which was: "can I access my pension earlier than the scheme's Normal Retirement Age of 65?" Her answer? Yes, you can access it at 55.

"Ok, but I'm of an age whereby the new pension rules kick in, which mean I cannot access my pension until 57." She wasn't aware of this rule change!! OMG! I even tried to save face for her, by saying, maybe all the schemes you look after have protected ages of 55, so you'll have no reason to know about it, but she didn't know what I was talking about.

She has promised to send my list of questions to the "admin" team who will be better placed to answer them. It's not like she was a secretary just fielding and diverting calls to the relevant department - I was on hold for 10 minutes before I spoke to her!

Hilariously, when I asked if one of the things mentioned in the letter I had from them was the same as the LTA (it certainly sounded like it), she said she didn't know, but agreed it sounds like it. She then proudly told me that the current LTA is £1.25m!!

Anyway, she has agreed to send me a copy of the Scheme Rules, so hopefully I'll be able to get more sense out of them than I did her.

Alaric
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Re: Money purchase underpin

#494047

Postby Alaric » April 13th, 2022, 4:50 pm

UrbanAchiever wrote:
Does that mean my money purchase underpin has been "removed" or, being a cynic, are they only quoting the lower number in an effort to encourage me to transfer out?


Has it been established whar they actually mean by a "money purchase underpin"? The term money purcgase used to be used for what are now usually knon as defined contribution schemes. In other words what you get will depend on investment returns.

At one times there was a perception that those who left a defined benefit scheme at a young age didn't see the benefit of employer contributions and even worse may have seen their own contributions used to cross subsidise older employees. With the extension of revaluation of deferred benefits and the low returns available on fixed interest investments, that problem should be of the past, so no further need of a "value for your contributions" clause.

UrbanAchiever
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Re: Money purchase underpin

#494080

Postby UrbanAchiever » April 13th, 2022, 6:37 pm

Has it been established what they actually mean by a "money purchase underpin"? The term money purchase used to be used for what are now usually known as defined contribution schemes. In other words what you get will depend on investment returns.


Having done more reading on this and read again my pensions leaving statement, I'm confident that the MPU is there as an "insurance" against the DB not providing the level of income expected. My Statement of Leaving Benefits says that on retirement the value of the post April 5, 1997 pension will be compared to the value of the MPU. If the MPU provides a higher benefit, this higher benefit will be paid and added to the value of the pre April 6, 1997 benefits.

On my last pension statement before I left, the notes state: " It is unlikely that the MPU will provide a higher return than the formula pension, but we are required to advise you of the contributions and amount of MPU accrued at the statement date."

Having established that most of the separate elements of my pension are index linked (capped at 5% pa) pre-pension commencement, I have applied a 2% RPI pa increase, which gives me a figure greater than the MPU, which means it is unlikely to be called upon.

Regardless, given the leaving statement quotes the MPU, I would like to think that it hasn't been "lost", however that is one of the questions she is passing to the admin team to come back to me on. The Scheme Rules will hopefully allow me to check this too.


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