Company pensions are not what they were
Saturday 01 August 1998
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.
Life & Style blogs
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
- 1 Kylie Jenner challenge: Bizarre lip suction device inspired by Kardashian sister goes viral
- 2 Rarest Beanie Baby bought for just £10 at car boot sale could be sold for £62,500 on eBay
- 3 Katie Hopkins and The Sun editor are reported to police for incitement to racial hatred following migrant boat column
- 4 Bruce Forsyth backs assisted dying campaign: 'If I had Alzheimer's or dementia I would do something about it'
- 5 Giorgio Armani criticises the way some gay men dress saying 'a man has to be a man'
£14000 - £18000 per annum: Recruitment Genius: An Office Administrator is requ...
£12000 - £40000 per annum: Recruitment Genius: Due to expansion and growth of ...
£40000 - £50000 per annum: Ashdown Group: Senior PHP Developer position with a...
Negotiable: Recruitment Genius: An Operations Leader is required to join a lea...