# Final Salary Pension - Raising Retirement Age.

Heres a semi-hyperthetical question...
In a final salary pension scheme the amount of pension a person will receive can be calculated by the number of years they work divided by 62. ie if Bill works for 40 years then he can expect 40/62 of the salary at retirement.
ie if the NPA (normal pension age) is 65 and Bill earns £40000 at time of retirement and has worked since age 25 then he can expect a pension of £25000 pa to start when he is 65.
My question is, what if any legal protection exists against the company raising the normal pension age (NPA) - ie in an ultra-extreme case could they, when Bill is about 60, turn round and say, 'sorry, we have decided to rasie the NPA to 100, nobody gets a pension until they reach 100'
ie Bills renumeration consisted of his salary which he was paid each month and his pension which is promised to him at a certain age. - but if this age is increased then this promised 'pot' is much less.
...ie the point im making is can a company take back money thats already been earnt?
I can understand the fairness (in priciple) of a company saying 'You can claim the pension you have earnt to date at 65, but any pension earnt from now on cant be claimed until you are 100', but want to know if it is legal for a company to claw back pension entitlement already earnt?
Thanks
David Bevan

Heres a semi-hyperthetical question...
In a final salary pension scheme the amount of pension a person will receive can be calculated by the number of years they work divided by 62. ie if Bill works for 40 years then he can expect 40/62 of the salary at retirement.
Not sure I entirely agree with this. It depends on the scheme. For example I am in USS, an 80ths scheme under which each year of service earns me 1/80 x final salary, plus a lunp sum of 18 months pension
other schemes are 60ths schemes, so the entitlement is 1/60 for eachyearof service, but with no lump sum.
The point surely is that his rights under the pension scheme are accrued year by year - I have 22 years service,and therefore have an accrued entitlement to a final pension of 22/80ths x final salary at 65.
Now I accept that the rules can be changed for new entrants, so that the NPA becomes 100, and I probably accept that the rules canbe changes so that for my FUTURE service pension entitlement cannot be cashed in until 100.
But I do not accept that my accrued entitlement to a pension of 22/80th at age 65 can be taken away. I think I am entitled to that under a contract with my employer and under the Trust Deed governing USS, and I think that a retrospectiver change in that would be expropriation of property and would infringe ECHR, quite apart from any domestic law remedy I would have - and as I say I think I would have remedies in contract and in trust.
Andrew McGee
Thanks, thats an interesting reply!
I mentioned that the question was semi-hyperthetical. The real case scenario is that I am 32 and have worked for a company for 11 years and so have earnt 11/62 of my final salary which I could have claimed at 62.
But my employer has decided that this NPA is now going to raise to 65. They have introduced a sliding scale so that anyone over 50 is not affected (ie can still retire at 62) but anyone under 40 now gets thier pension at 65 (with those inbetween getting a retirement age inbetween)
Now I know that the numbers involved are much smaller than in the Bill example, but the princlple is the same. ie the 11 years of pension I was expecting to recieve from age 62 I now wont get until im 65.
I know that the scheme is still a good deal, but is this change fair/legal? ...and if it is, then is it fair/leagal to keep raising the age or is what i have already earnt save?
Thanks
David Bevan

It may have changed recently, but as far as I'm aware, you must take benefits by age 75.
It all becomes academic when your employer did what ours did. They offered everyone 55 years or over an early retirement scheme which gave us a 40% enhancement of "pension earned to date". I grabbed it eagerly, aged 58, some acted upset and hurt, but came round in the end. It was an opportunity not to be missed. However, my point is that those who didn't volunteer were pushed the following year. It would have been nice to have had the *chance* to stay until 65, bearing in mind how life expectancy has improved....
Although people may or may not have wanted to go early your company were not taking back pension already earned. In effect they were just closing down the pension scheme. The 40% figure is a reduction due to early retirement.
Far fewer people die between 55 and 65 than between 65 and 75 so taking the pension 10 years early costs a lot of money as the pension calculation assumes (correctly) that for every year the pension age is increased there will be fewer people who are actually alive to claim their pension.
Presumably although the company were 'pushing' people out, you could have reitered, but defered your pension and still taken 100% of "pension earned to date" when you reached 65.
David Bevan
wrote
Ermmm - he said it was a 40% *enhancement*, not "reduction"
wrote
Isn't 140% from age 58, better than 100% from age 65? ;-)
wrote
Do you expect to still be working for them at age 62? [If you are still working there at age 62, and wish to continue working, then there wouldn't be an issue would there?]
Ask them if they intend to attempt to apply the new retirement ages to "deferred members" as well as "active members". [I suspect that the old retirement ages may apply for deferred members, for service prior to the change.]
If you leave the scheme before age 62, then you will become a deferred member....

But 140% of what? More is less.
Given that it's a years-of-service scheme, what's on offer is, I understand, a choice between
140% of S*X/62 and 100% of T*(X+7)/62,
where X is the number of years of pensionable service he has now, S is his salary now, and T is his projected salary at 65, no?
If his anticipated salary inflation is 7%pa, T will be 161% of S. If he expects to have 40 years of service at 65, then X3 and (X+7)/X is 121%.
So in effect the 100% deal is worth 95% more than the 140% deal.
This is Mephistophelian offer. You get let off 7 years of your hard labour sentence and get to go to the land of milk and honey immediately, on condition that you agree to reduced rations of milk and honey for life, relative to what they would be if you carried on serving your full sentence. But the reduction is almost half.
Not an easy choice, but I think I'd go for it - there's more to life than milk and honey, which aren't really my cup of tea anyway.
"Ronald Raygun" wrote
NO! What's on offer is a choice between: (1) A pension, starting at 140% of S*X/62 at age 58, and probably increasing at RPI and payable for life; -OR- (2) A further 7 years of hard graft while receiving NIL pension, then (hopefully, if the person hasn't died in the meantime) a pension starting at 100% of T*(X+7)/62 at age 65, etc.
"Ronald Raygun" wrote
That's not until age 65, though, and the "140% of S*X/62" would have been paid at age 58. By the time he got to age 65, the "early retirement pension" would have grown, using (say) 5%pa increases (about 2%pa less than your assumed salary increases), to 140.7% of "140% of S*X/62".
"Ronald Raygun" wrote
OK, so 140% of S*X/62 would be about 75% of S at age 58, growing to about 105% of S at age 65. [140% x 33 / 62 x S = 74.5% of S; 74.5% x 1.05^7 = 104.9%.]
Alternatively, waiting until age 65 to retire, the pension would start at less than 104% of S, and he'd 've had to work an extra 7 years to get it! [100% x 40 / 62 x (161% of S) = 103.6% of S.]
"Ronald Raygun" wrote
Hardly! Retiring early, he get's an extra 7 years of pension, *plus* a little more each year after age 65.
You have been looking at the pension payable in one year for each, and 7 years apart - at age 58 in the first case and at age 65 in the second.
Suppose you looked at age 60 in the first case and age 62 in the second -- would you say that "the 140% deal is worth an infinite multiple of the 100% deal"? [The 100% deal being zero for that year!] No, of course you wouldn't. You need to consider the value of all payments, each & every year that they will be paid....

That's what I said.
So what? He either takes the offer of option 1 and retires now, at 58, or he carries on working until 65. In the latter case, he gets a bigger pension from 65, and meanwhile rakes in a full salary to boot. With option 1, there is no more salary, and he has to adjust his lifestyle, from 58 until death, to fit the budget commensurate with a half-rate pension, whereas with option 2, he's rolling in lolly for 7 fat years, and collects a full pension thereafter.
But getting paid handsomely for it.
Yes, I didn't make allowances for the pension to be index linked. That makes it much better.
How is the 100% deal worth zero at 62?
Sorry, didnt read it properly!
David Bevan
I was expecting to retire at 62 by which time I would have 40/62 (which I think is the max allowed)
...under the new rules if I still want to leave at 62 then I will have to fund my own pension for 3 years.
This is fair enough for my future pension entitlement, but I already have 11/62 so surely it would be fairer for me to be able to claim 11/62 from age 62 and then have the remaining 29/62 cut in at 65? - or am I missing something?
Take two possible situations...,
1) I resign the day before these rules take effect and so would have earnt 11/62 payable at 62.
2) I resign the day after these rules take effect and so would have earnt 11/62 payable at 65.
...which hardly sounds fair, but if in case 1 the age would have to be 65 then this is also unfair (illegal?) since its devaluing my pension already earnt?
The question I need answered is can a company take back part of a pension that has already been earnt?
Thanks
David Bevan
wrote
You are more likely to have the choice of: (a) Taking the entire pension from age 62, but with the "11/62" part paid in full and the "29/62" part reduced for early payment (aka "early retirement reduction"); or (b) Taking the entire pension from age 65, but with the "11/62" part increased for late payment and the "29/62" part being paid normally.
wrote
I don't think this latter case would happen, which is why I suggested you ask them whether they'll try to apply the new rules to deferred members (for service prior to the change).
wrote
I don't believe they can, but I'm not 100% sure of the law on this. But if you are still working for them past age 62, they might have a rule in the "Trust Deed & Rules" of the scheme which says you cannot take the pension while still working there. Which is why the situation is awkward for people working past age 62...
"Ronald Raygun" wrote
No, you compared '140% of S*X/62' (the pension payable in just the single year from age 58, if he retires then) with '100% of T*(X+7)/62' (the pension payable in just the single year from age 65, if he retires then). That's comparing a single year's payments of '74.5% of S' against another single year's payments of '103.6% of S'.
I compared a complete cashflow (for each & every year) against the other complete cashflow - you ignored all years after age 59 in the first case (and all years after age 66 in the second case).
"Ronald Raygun" wrote
No he doesn't! As I showed earlier, if he retires early (option 1) then his pension at age 65 (after already receiving seven years of payments) is 104.9% of S. But if he waits and retires at age 65 (option 2), then his pension at age 65 (ie in the same year for proper valid comparison) is only 103.6% of S.
I do believe that 103.6% of S is *NOT* bigger than 104.9% of S!!
"Ronald Raygun" wrote
For which he has to work (perhaps very hard)!
"Ronald Raygun" wrote
Not necessarily. Just because he retires from the original job, doesn't mean that he can't take another job. He could "semi-retire", taking his pension plus a part-time wage (which might in total be equivalent to the original job's full-time salary) and only have to work half of the hours to get it!
"Ronald Raygun" wrote
Agreed, but he has to work much harder during those 7 years to get it!
"Ronald Raygun" wrote
Well, as I've shown, his pension from age 65 would actually be slightly *lower* than the amount the pension would have grown to by that age, had he retired early.
"Ronald Raygun" wrote
Not so (see other comments).
"Ronald Raygun" wrote
Indeed. But even if it weren't, the actual **value of the entire cashflow from the pension earned during the first 33 years' service** would still be higher if he took it early -- unless his salary increased *much* faster even than general investment returns in the following seven years (usually very unlikely).
"Ronald Raygun" wrote
In your comparison, you only looked at the pension paid in just a single year-of-life (age 58 for the early retirement case and age 65 for the later retirement case). I just picked two other particular "years-of-life"... [In the "later retirement" case, he receives no pension until age 65 and so for the year at age 62 the pension received is zero.]
Of course, this is not a valid comparison (either mine at ages 60/62, or yours at ages 58/65). I was just trying to point out that you actually need to add up the total values of *all* years of pension, not just the amount paid during the first year of receiving it. [In fact, the early retirement pension will be received for upto seven years longer than the later retirement one.]
As I understand it is usual for these things to be phased in, ie the revised terms apply from a specific future date, so the contributions already made retain their original value in terms of years. Future contributions would only buy say 1/45 rather than say 1/40 of final salary for each year of service. However I guess it depends on the terms of the scheme (and the financial health of the company/body running it).
Heres a semi-hyperthetical question...
In a final salary pension scheme the amount of pension a person will receive can be calculated by the number of years they work divided by 62. ie if Bill works for 40 years then he can expect 40/62 of the salary at retirement.
ie if the NPA (normal pension age) is 65 and Bill earns 40000 at time of retirement and has worked since age 25 then he can expect a pension of 25000 pa to start when he is 65.
My question is, what if any legal protection exists against the company raising the normal pension age (NPA) - ie in an ultra-extreme case could they, when Bill is about 60, turn round and say, 'sorry, we have decided to rasie the NPA to 100, nobody gets a pension until they reach 100'
ie Bills renumeration consisted of his salary which he was paid each month and his pension which is promised to him at a certain age. - but if this age is increased then this promised 'pot' is much less.
...ie the point im making is can a company take back money thats already been earnt?
I can understand the fairness (in priciple) of a company saying 'You can claim the pension you have earnt to date at 65, but any pension earnt from now on cant be claimed until you are 100', but want to know if it is legal for a company to claw back pension entitlement already earnt?
Thanks
David Bevan

"Tim" wrote
"Tim" wrote
"Tim" wrote
"Tim" wrote
"Tim" wrote
"Tim" wrote
"Tim" wrote
"Tim" wrote
Ronald, would you care to attempt approximately valuing the two different cashflows (for early or later retirement), with and without indexation of pension? Let us know what you get!

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