Money Help Desk: Exiting your pension can be the right move

I WAS surprised at Tom McPhail's response to a recent pension enquiry ("Pensions should be safe despite takeovers", 28 March), which implied your pension rights were protected in the event of a takeover.

Reading it you might believe that your pension is largely safe, other than the risk of it entering the Pension Protection Fund, which admittedly is a vast improvement on the previous state of affairs (ie no provision whatsoever).

However, the truth is that this is not the only scenario which could unfold. Take, for example, the saga of former Prudential staff at the Stirling site, who are now working for Capita. After two years the company is proposing altering pension terms.

So let's be clear: there are significantly worse possible scenarios for company pensions caught up in takeovers or buyouts, not just the one where the PPF rides to the rescue.

As you may have guessed by now, I have a particular interest in the subject as I am a deferred member of my previous employer's final salary fund. That company is currently in a "difficult position" and looking at a range of options.

I worry that any potential buyer will see the significant deficit of the fund as a bargaining tool and seek to offload it as part of a deal, or simply wait the two years then impose a "radical solution".

Either way, the prospects for the fund look poor in my estimation. So why shouldn't I transfer out and take control of my pension? The almost universal advice on final salary schemes is "don't transfer out" as you will probably be worse off as a result.

However, I believe that this statement needs qualification. Transferring out of a demonstrably stable company fund with good management is almost certainly a bad decision. Getting out of a vulnerable fund might be a smarter long-term decision.

As someone once said: "I am more than capable of losing 10 to 20 per cent of my fund's value on my own; why should I let someone else lose it for me?"

Finally, regulations require that anyone requesting a transfer out of a final salary fund must have a pension analysis done. What they fail to point out is that this is a technical analysis only, ie comparing likely pensions based on fund value and projected growth rates and annuity data. What it doesn't and can't consider is whether the fund will survive in that form into the future anyway!

BB

Tom McPhail, head of research at Hargreaves Lansdown, writes:

Existing pension rights are normally protected under Section 67 of the Pensions Act 1995 introduced in the wake of Robert Maxwell's raid on the Mirror Group pension scheme. This means that while employers can restructure staff pensions in respect of future service, whatever has been built up in the past should be honoured.

I recognise that there are reasons why this will not always happen; indeed I suspect that Section 67 is likely to come under increasing pressure in the future. If an employer actually goes bust then of course the PPF should step in. Sometimes, though, employers and workers may decide to negotiate a revision to pension benefits in the interests of preserving the company and jobs. It remains to be seen how common this becomes.

As for transferring out, you are right that sometimes it can make sense, particularly when judged against the PPF benefits; I have seen cases where a scheme member could transfer to a Sipp (self-invested personal pension), "enjoy" negative growth rates every year through to retirement and still end up with a larger pension than that which the PPF would deliver for them.

The problem is that, particularly when dealing with mass communication such as the media, we need to use generalisations and, for most people most of the time, transferring out of a final salary scheme is likely to be a bad idea.