News/Events

Beware of the detail in generous final salary schemes [12th November 07]

Defined Benefit pension schemes, also known as Final Salary schemes, are salary-related occupational pension schemes.

The main advantages of salary-related pension schemes are the guaranteed benefits they often provide which make them very attractive and beneficial to employees. They are very generous when compared to other pension savings plans as the amount you will receive as an income when you retire can be calculated depending on your length of service and your final salary. They can also provide additional benefits which may include death in service, long term sickness cover, sometimes lower retirement ages and a spouse’s pension to name a few. 

Other types of pensions, commonly known as defined contribution pensions, simply build up a fund during a working life but there is no formula to calculate what this will be worth on retirement; it will be entirely dependent on the performance of your investment funds and market conditions. 

With this in mind Final Salary schemes are considered to be the Aston Martin of the pensions-world so members of existing Final Salary schemes should thank their lucky stars (and their employers)!

However, as life expectancy has increased, Final-Salary schemes are becoming progressively more expensive for employers as they are paying for longer retirements. Some employers have chosen to close the salary-related scheme to new members or new and existing employees by offering a new pension scheme if it becomes too costly to continue. Rentokil became the first in the FTSE 100 to announce plans to shut its scheme to existing workers. Debenhams, WH Smith and even ITV are examples of other large corporations which have followed suit, with more expected to join them.

Some Final Salary Schemes have had bad press in recent years as some schemes have experienced funding problems and large deficits where members have lost some or all of their retirement benefits. The Government has set up a Pensions Protection Fund in April 2005 which, subject to available funding, pays some compensation to salary-related scheme members. However, the compensation can be lower than what the scheme would have paid and is not guaranteed.

As an employer you may also be a Trustee of the scheme. Trustees (of any type of pension arrangement) have legal obligations under the Trustees Act to review the scheme regularly and ensure the scheme has enough funds to provide the full entitlement to all the members, even if the scheme has been closed to new members. Many Trustees of Defined Benefit Schemes are not fulfilling these obligations. If you are in doubt of what these are, contact Langtons

For those still fortunate enough to still have pension benefits in a salary-related scheme you are very privileged. However our message is do not rely on your company alone to review this plan, check your annual Summary Funding Statements for the Statutory and Solvency funding as an indication to your schemes performance and sustainability. The Summary Funding Statement is a highly technical document so seek professional advice to interpret it, if only for the reassurance that you are still part of a well-funded scheme.  If this is not the case, you should be aware of your options.

Contact your IFA and one who specialises in Retirement Pensions Planning.

This article was written by Langtons - Published in the Western Morning News, This is Money, 13th November 2007