Company pensions are not what they were

JOBS FOR life are the exception rather than the rule, and traditional company pension schemes usually known as "defined benefit" pensions which provide employees with a guaranteed pension based on their final salary and length of service are also being phased out, writes David Emery.

The writing has been on the wall for final salary schemes for some time. The guaranteed nature of the benefits implies that employers can be forced to stump up additional contributions if, say, investment performance falters or scheme expenses rise. Under such circumstances, the money purchase concept where pensions depend solely on how well the contributions have been invested looks increasingly attractive to employers, especially smaller companies employing under 250 staff.

The 1995 Pension Act provided a major stimulus to the flight out of final salary schemes. Measures such as the indexation of benefits in retirement and the appointment of member nominated trustees added cost and administrative burdens, and persuaded many employers to abandon occupational schemes (both final salary and money purchase) in favour of Group Personal Pensions, which are essentially personal pensions masquerading as a company scheme.

A recent survey by the Association of Consulting Actuaries (ACA) finds that a third of responding companies offering final salary schemes are even more likely to switch to money purchase schemes now that ACT credit has been abolished, a quarter would close their schemes to new entrants, or wind up their schemes altogether if they were required to offer payroll deduction for contributions to a Stakeholder Pension, and nearly 50 per cent would do the same if employers were also required to contribute to Stakeholder Pensions.

There is a delicious irony in all of this. On the one hand, the Government rages against insurance company agents and Independent Financial Advisers for luring employees out of final salary schemes into Personal Pension Plans. On the other, its own initiatives appear to be driving employers to abandon their final salary schemes in favour of Group Personal Pensions.

The employer has three options when changing from final salary to GPP. The final salary scheme can be wound up. A transfer value is paid over to the GPP for each member, reflecting the capital value of guaranteed benefits earned to date. The final salary scheme can be left in a paid- up form, and future contributions directed into the GPP. Or the final salary scheme can continue to operate for existing members, but be closed to new prospective members.

Strictly speaking, an employee cannot be compelled to switch from a final salary scheme to a GPP. In practice, however, the employer can always wind up the final salary scheme. There are however two pitfalls to watch out for, the level of employer and employee contributions, and the level of charges.

The evidence on contributions is not heartening. Mr Martin Slack, Chairman of the ACA says: "It is of particular concern that our survey found that joint contributions are significantly lower into GPPs than into final salary and company money purchase schemes run by smaller companies." Lower contribution rates mean lower pensions!

On the question of costs, the GPP is likely to be more expensive than the final salary scheme because it is administered as a collection of individual plans, and because of higher commissions paid to intermediaries. Nevertheless, there are economies of scale in running GPPs. There is therefore little point in refusing to join your employer's GPP and going it alone, as your individual PPP will be even more expensive to run, and you may forego the employer's contribution.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
ebooksA superb mix of recipes serving up the freshest of local produce in a delicious range of styles
Life and Style
ebooksFrom the lifespan of a slug to the distance to the Sun: answers to 500 questions from readers
Arts and Entertainment
music

News
Russell Brand at an anti-austerity march in June
peopleActor and comedian says 'there's no point doing it if you're not'
Arts and Entertainment
Banksy's 'The Girl with the Pierced Eardrum' in Bristol
art'Girl with the Pierced Eardrum' followed hoax reports artist had been arrested and unveiled
News
i100
Voices
Oscar Pistorius is led out of court in Pretoria. Pistorius received a five-year prison sentence for culpable homicide by judge Thokozile Masipais for the killing of his girlfriend Reeva Steenkamp
voicesThokozile Masipa simply had no choice but to jail the athlete
Arts and Entertainment
Sister Cristina Scuccia sings 'Like a Virgin' in Venice
music

Like Madonna, Sister Cristina Scuccia's video is also set in Venice

Arts and Entertainment
James Blunt's debut album Back to Bedlam shot him to fame in 2004
music

Singer says the track was 'force-fed down people's throats'

Life and Style
The Tinder app has around 10 million users worldwide

techThe original free dating app will remain the same, developers say

News
news

Endangered species spotted in a creek in the Qinling mountains

News
peopleJust weeks after he created dress for Alamuddin-Clooney wedding
Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs General

    IT Security Advisor – Permanent – Surrey - £60k-£70k

    £60000 - £70000 Per Annum plus excellent benefits: Clearwater People Solutions...

    MI Analyst – Permanent – West Sussex – £25k-£35k

    £25000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

    English Teacher

    £110 - £130 per day: Randstad Education Preston: The Job ? This is a new post...

    Primary General Cover Teacher

    Negotiable: Randstad Education Southampton: We are looking for Primary School ...

    Day In a Page

    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Let's talk about loss

    We need to talk about loss

    Secrecy and silence surround stillbirth
    Will there be an all-female mission to Mars?

    Will there be an all-female mission to Mars?

    Women may be better suited to space travel than men are
    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album