Is my final salary pension guaranteed?

Many savers think that their final salary scheme is gold plated and that they are guaranteed a pension for life, based on their final salary and length of service with the employer. Whilst this is true for many schemes, some employers have got into financial difficulty and this has resulted in the pension scheme being unable to provide the promised pensions. In 2019, of the 5,422 schemes eligible for the Pension Protection Fund, 65% were in deficit, and 35% in surplus (PPF Purple Book 2019). The deficit of these schemes at the end of August 2020 was £258.6 billion (

Many schemes are closing to new members or making changes to the way in which benefits accrue. For example, increasing the normal retirement age to 65, or restricting inflation increases from five percent to two and a half percent each year. If a company goes bust, and the pension fund is in deficit, it is likely that the pension will be transferred into the Pension Protection Fund. The Pension Protection Fund pays compensation to members of failed schemes, usually at a lower level than the pension expected from the ceding scheme.

To think that your pension is guaranteed would be incorrect. Therefore, it is important to review your pension scheme’s funding position and the longevity of the employer to avoid any nasty surprises in retirement.

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 much 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 the pension scheme’s assets has led to many employers unable to handle the financial burden of ensuring their pension scheme remains adequately funded. As a result, most final salary schemes are now closed.

If my scheme closes what does it actually mean?

It is important to understand that there are essentially two types of closure. The first type of closure is closing the scheme to new members, meaning that any new employees of the company are not invited to join the company final salary scheme, and would be offered entry into a defined contribution scheme. Existing members would not be affected by the closure.

The second form of closure is to close the scheme to future accrual, meaning members of the scheme no longer accrue benefits in the scheme, and have a deferred or frozen pension. Due to the current pension 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 will be preserved, and you will generally receive increases to your pension in line with inflation. However, as a result of the scheme closing, you will not build up further pension benefits. Normally you will be offered membership to the company’s defined contribution scheme.

Where is my pension invested and can I choose the investments?

The investment strategy is the responsibility of the Trustees, and the employer is responsible for making contributions to cover any shortfalls. The member has no control over where the Trustees invest the assets.

How is a Cash Equivalent Transfer Value calculated?

Pension experts and actuaries calculate the Cash Equivalent Transfer Value by considering lots of factors and assumptions, including the age of the member, retirement age of the scheme, inflation expectations, average life expectancy and expected gilt yields.

Gilts are UK Government issued bonds. Or to put it another way, it is a loan to the Government, and in return, the Government will pay interest to the bond owner until the capital is repaid. Gilts are seen as one of the least risky investments, as they are Government backed. However, the returns from Gilts are very low, meaning the Trustees receive low returns on their investments.

The actuaries must calculate an estimate in today’s money of the cost of providing the member’s pension benefits at retirement, and then calculate the capital required to buy that retirement income today.

As such a large proportion of the scheme’s assets is invested into Gilts, a huge amount of capital is needed to provide each member’s pension, which puts the pension scheme under even more financial pressure.

Will my Cash Equivalent Transfer Value go up every year?

Not necessarily. The value offered by the scheme is based on several assumptions, rather than the investment returns of the scheme’s assets. The current low interest rate environment has resulted in record high transfer values being offered by schemes, as the cost of providing the pension is significantly higher when the scheme is receiving low returns on the assets (due to low yields on gilts).

Can I still receive my pension whilst living abroad?

Most defined benefit schemes will only pay a pension to a UK bank account.

What happens if join another pension scheme?

If you were an active member of a scheme and cease employment, your benefits will become deferred or ‘frozen’. Being a member of a new scheme will not impact a pension which has already accrued.

How will my pension continue after my death?

This depends on the rules of the individual scheme. Generally, there will be a pension payable to a spouse or civil partner, and a dependant’s pension for any financially dependent children. It is worth checking the scheme rules, as scheme rules differ, as well as definitions of dependent children.

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