Members of defined benefit (DB) pension schemes are in a catch-22 situation when it comes to deciding whether to transfer out of their scheme or stay where they are and risk major retirement losses should insolvency hit, says Aon Consulting.

The employee risk and benefits management firm believes that high earners face the toughest decision as they could lose up to two thirds of their pension if their employer becomes insolvent and unable to fund the scheme.

Aon said that under normal circumstances, the majority of employees would remain in a DB scheme because of the certainty of income, although at a time when business insolvencies are rising and funding levels are falling, this income becomes less guaranteed. Aon says employees, particularly those with higher pensions, should consider transferring to a defined contribution (DC) pension scheme.

However, should members with the highest deferred pensions transfer out of their DB schemes, the remaining shortfall would be spread amongst those left in the scheme. This would mean these members potentially receive less than if the transfers had not taken place.

Paul McGlone, principal and actuary at Aon Consulting, said: "The majority of employers do not face the threat of insolvency and most final salary scheme members would be wise to keep their pension where it is. However, for those high earners in schemes where the sponsoring employer is at serious risk, the opportunity to transfer out before insolvency is one that should not be ignored.

"In general terms the higher your deferred pension, then the bigger the impact that insolvency could potentially have on you. But forecasting insolvency in advance is clearly not a trivial exercise. Members also need to recognise that while staying put gives you the option to transfer out later should you decide, once you transfer that decision is irreversible," he added.

- Pensions Age March 2009

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