Is my Final Salary Scheme guaranteed?
Many employees think that membership of a final salary scheme is gold plated and that they are guaranteed a pension based on their final salary which is normally based on credits for each year of service. Whilst this may be true for some schemes and that the Trustees are in a position to fund the pension in full the majority of Final Salary Schemes are not in this position. The level of promises made by employer’s is far in excess of what they can afford which is why out of 6,316 FS schemes 4,973 have funding difficulties despite employers investing hundreds of millions into the schemes.
Many schemes are closing to new members or preventing further increases in benefits or increasing the retirement age of the scheme to limit payments out. Also, there are many companies that go bust and generally most schemes are then passed to the Pension Protection Fund to administer. Therefore, to think that your pension is guaranteed would be wrong and it is important that you review your schemes solvency and the Trustees future plans.
What is the Pension Protection Fund and what does it do?
When an employer becomes insolvent what happens to the pension scheme if it is a Final Salary Scheme? Such schemes are reliant on the employer making contributions so when an employer fails members have deferred annuities bought for them which means a large part of the benefits they thought would be payable in retirement are not. In order to try and alleviate such conditions the UK Government set up the PPF.
The Pension Protection Fund’s main function is to provide compensation to members of eligible defined benefit pension schemes, when an employer becomes insolvent and they qualify for inclusion in the scheme and where there are insufficient assets in the Pension.
The PPF was established under the provisions of the Pensions Act 2004 and an annual levy is charged on all UK eligible schemes.
The scheme will top up any scheme pension that will be paid (or is already being paid) to 90 per cent of the pension an eligible member has accrued subject to a cap per member of £32,575 a year (for anyone whose entitlement begins between 1 April 2013 and 31 March 2014 – different amounts apply depending on the date entitlement starts) for each scheme. . The cap will be revalued on an annual basis according to the Consumer Prices Index.
The payments to members will be made for life from normal retirement age (but not before age 60) or from 14 May 2004, whichever is later, indexation is limited to accruals from April 1997 only and capped at 2.5 per cent.
I have been told that my final salary scheme is closing. Why is my scheme closing?
Over the years final salary schemes have become more and more expensive for employers to fund. People are now living longer and longer and it is not uncommon for individuals to survive for 30 or 40 years after they retire. This coupled with poor investment returns on pension scheme assets has led to many employers unable to handle the financial burden of ensuring that their pension schemes remain adequately funded. As a result the vast majority of final salary schemes are now closed.
If my scheme closes what does it actually mean to me?
It is important to understand that there is essentially two types of closure. The first and most common type of closure is closing the scheme to new members. What that means is that any new employees of the company are not invited to join the company final salary scheme and are normally instead offered entry into an inferior defined contribution scheme. If you are an existing member of the scheme then ordinarily you will be unaffected by the schemes closure.
The second and more drastic form of closure is to close the scheme to future accrual. What this means in practice is that members of the scheme no longer receive pension increases in line with their pensionable salary and length of service with the company. Unfortunately due to the current pensions crisis many schemes are now closing their scheme to future accrual. This is seen by many pension experts as the final nail in the coffin for final salary schemes.
If my scheme has closed to future accrual does that mean I have lost my benefits?
No, the benefits that you built up within the scheme up to the date of service will be preserved and you will generally receive increases to your pension in line with the inflation measure adopted by the scheme. However, as a result of the scheme closing you will not build up further pension benefits. Normally you will be offered membership to the companies Defined contribution scheme.
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