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.

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