Question: I am a 60-year-old deferred pensioner and would like your advice on a matter concerning my pension. I was terminated by way of redundancy in May 2011. My pension plan/trust deed states that the formula for calculation of pension is as follows: 1.75% x Annualised Pensionable Earnings received in the year ending on the Base Date x Years of Pensionable Service to Base Date Plus 1.75% x Earnings received after the base date to member's early/normal retirement date.
The issue I have is that my pension is being calculated on the previous base date of December 31 2008, and not the new Base Date of December 31 2011. The reason given for using the old base date is that the new base date of December 31, 2011 became effective in January 2012. If the base date is December 31, 2011, why would it be effective in January 2012? Please inform me how base date is used in pensions generally and also what would be applicable in my case with reference to 1.75% x Annualised Pensionable Earnings received in the year ending on the base date?
PFA: There are many persons who have questions about their pension benefits. More persons should make an effort to get satisfactory answers to such questions, if necessary, from independent and qualified persons.
It is challenging to answer specific questions such as yours without seeing the documents such as the trust deed and rules of your particular plan. The answers which follow are based on consultations I had with an actuary who has vast experience in pensions.
The concept of base year in pensions usually arises in respect of a defined benefit modified career average salary pension plan. The base year is that year for which the annual salary for each previous year is deemed to be equal to the annual salary in that year for the calculation of pension benefits, as illustrated below:
Base Year - 2012
Annual Salary in 2012 - J$2m
Annual Salary in 2002 - J$1m
For pension calculations, the annual salary in all previous years starting with 2011, is deemed to be equal to J$2 million. This includes 2002.
In your particular case, your benefits were calculated on the base year 2008 as that was what was in effect at the time of your departure in May 2011; the change of base year after the termination of your employment would, therefore, not apply to you.
base year may be changed
The rules of the pension plan usually state that the base year may be changed from time to time by the Board of Trustees on the advice of the actuary.
The change of the base year will always increase the liabilities of the pension plan, hence the actuary will make the recommendation to change the base year only if there is money in the plan to pay for this increase.
This determination is made after the actuary does a valuation of the plan.
Valuations are done every three years, but there is no guarantee that the actuary will recommend a change in the base year even if the fund has a surplus sufficient to pay the additional liabilities created as factors such as the state of the economy may weigh on the decision to make a recommendation.
Ultimately, it is the trustees who make the decision on the advice of the actuary. From the above, it should be clear that it is almost impossible for anyone to successfully challenge that decision.
You should write to the Board of Trustees and ask them to give answers to the questions and concerns that you have. If you are not satisfied with the response, under the Pension Act, it is your right to write to the Financial Services Commission about your concerns.
The Financial Services Com-mission will then write to the Board of Trustees requiring them to provide clear answers to those questions.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial email@example.com