If you are a past member of a defined benefit pension schemes who has not reached retirement, you are known as deferred members. As deferred members, you now have the option of leaving the deferred benefit in the defined benefit scheme until retirement, or transferring the value into a policy in your own name.
There is a risk that if you leave the deferred benefit in the scheme, you may not get the full pension promised.
The main risk is that one or more of the following things will happen:
- The trustees could reduce the deferred pension before you reach the retirement age
- The trustees could reduce the pension in payment after retirement age
- The scheme could wind up with a deficit either before or after your retirement age.
Where the past employer is solvent at the time of wind up but cannot or will not make up the deficit, the assets of the scheme are used as follows:
- Additional voluntary contributions
- Pensioners varying by the level of their pensions
- Active and deferred members – 50% of their transfer value
- Pension balance of their entitlements not provided at 2 above
- Active and deferred clients balance of their transfer values
- Post retirement increases
As you can see, deferred and active members are particularly exposed in the event of a windup. If there are not enough assets to go all the way down the line, ie. if all assets are used for numbers 1 through 4 above, then the transfer value could be only 50%. In certain circumstances it could be even lower.
There is a risk that the employer will not have the financial commitment and or capability to fully fund the scheme on a long-term basis.
How far away from retirement age you are, and how many other scheme members who will become pensioners before you do, means that the further down the queue you are, the higher the risk of not getting the full deferred pension promised.