Your Money: No need for this pensions panic

Employers rushing to replace final-salary company pension schemes with inferior alternatives in the wake of the new Pensions Act may be cutting retirement benefits unnecessarily.

Companies are turning to lower-cost alternatives for fear that tough new controls on how pension schemes must be run will cost them more than they are able to pay.

Some firms are using the Pensions Act to reduce their commitment to their staff pension schemes. Surveys show that the amount paid into replacement schemes is often less than employers were previously willing to pay.

But according to Bridgeman Firth & Associates, a firm of financial planners and retirement consultants, many companies still want to do their best by their staff.

They are simply unaware that they could probably maintain most or all of the benefits formerly available simply by altering the way their old schemes are managed.

Tony Nevin, financial planning director at Bridgeman Firth, says: "There are many companies that are considering their options in the wake of the Pensions Act.

"Their concerns centre around a number of reforms introduced by the Act. One of them is the Minimum Funding Requirement [where pension funds must begin to deliver enough liquid assets to meet demands from pensioners should a scheme need to be wound up]. Underfunded schemes could require substantial cash injections.

"There is also the continuing cost of Limited Price Indexation [where fund benefits must either match inflation or 5 per cent, whichever is less]. Since it applies to benefits and not contributions, it is estimated that every 1 per cent rise in inflation can add up to 10 per cent to the cost."

The final straw for many schemes is the new Member Nominated Trustee requirement, which places far more onerous responsibilities on trustees, including unlimited liabilities in the event of something going wrong.

As a result, many employers are replacing their final-salary schemes, where benefits paid are linked to the income paid to the member at retirement multiplied by the number of years worked for the company, with Group Personal Pension schemes (GPPs).

GPPs are a form of personal pension arrangement where the company agrees to deduct a proportion of the employee's wages. It may also add an agreed amount to the GPP. The advantage is that the arrangement is portable in the event of the employee leaving. However, it is also potentially expensive and the benefits are not guaranteed.

Mr Nevin points out that closer monitoring of pension fund performance can often overcome some of the effects of the Minimum Funding Requirement, while trustee problems are dealt with by appointing an independent trustee company.

Finally, to overcome the continuing administrative costs of a final salary fund, it is possible to choose a targeted benefits scheme, which ensures savings through shared costs.

One such scheme is offered by Federated Pension Services, a firm originally set up in the late 1920s to provide retirement benefits to health staff.

Targeted benefits schemes are treated as if they were money purchase arrangements. In theory, a fund member and their employer pay a certain amount into a fund each year. The scheme "targets" a certain final salary that will be paid in retirement in return for the same contributions. The money is invested to produce a pension at retirement.

Although the link to final salaries is not guaranteed, the fund has met its target every year for the past 30 years. In addition, the fund's pensions are inflation-proofed, the one exception being in the 1970s, when inflation ripped ahead.

By pooling costs, such schemes allow small companies to offer higher pension benefitsn Nic Cicutti Bridgeman Firth & Associates: 01223 843933. Federated Pension Services: 01737 357272.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

PROMOTED VIDEO
Finacial products from our partners
Property search
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 Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    Move over, kale - cabbage is the new rising star

    Cabbage is king again

    Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

    Paul Scholes column

    The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
    Frank Warren column: No cigar, but pots of money: here come the Cubans

    Frank Warren's Ringside

    No cigar, but pots of money: here come the Cubans
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee