There has been a great deal of fuss in the press about April’s pension freedoms, but rather less about final salary pension schemes, sometimes known as defined benefit schemes, until this Saturday, when The Telegraph and the Yahoo financial website provided articles. The Telegraph pointed out that for high earners, the Pension Protection Fund, (PPF), is something of a mixed blessing as although some pension is guaranteed in the event of a pension scheme failure, it will not be 90% of the expected pension if that is over the salary cap of about £30,000 per annum. (See the original article at http://www.telegraph.co.uk/finance/personalfinance/pensions/11423713/Final-salary-pension-Your-retirement-income-is-at-risk.html)
Pension freedom legislation changes mean that it is probable that transfers out of some final salary schemes will be banned from April 2015, (generally the unfunded public sector ones, like the Civil Service and the Armed Forces), yet others will be able to transfer them to other types of scheme as cash. For a very select few members of final salary schemes, a cash transfer out may be advantageous, especially if they are very ill, single and investment risk seeking.
Anyone who is anticipating a final salary pension must keep an eye on the funding status of the scheme, as if it goes into default and is taken over by the PPF, there are no transfers out for anyone and the salary cap applies. Every year the Pension Trustees will send out a report on the pension scheme that will include a statement about the current level of funding. Any less than 100% suggests that there is a risk of scheme failure, but so long as the sponsoring employer is healthy and there is a credible funding plan in place, there is little reason to panic.
Unfortunately, if the final salary scheme is underfunded, a pension transfer cash payment may be reduced by the amount underfunded and any actuarial reductions, so leaving a scheme by taking a cash payment may be massively costly, making leaving your pension to the mercies of the PPF more acceptable.
For anyone with a final salary scheme, it is vital to keep an eye on the performance of your deferred pension scheme and the sponsoring employer. For me with a local authority scheme and a private sector scheme, I keep a close eye on the pension trustees and the level of funding, so I have some idea of the level of risk to my deferred benefits. Remember, pension benefits can be altered by the trustees, so long as they change the benefits across the whole class of beneficiaries and these do not have to be beneficial to the members individually. So far, for my private sector scheme, the sponsoring employer has met their obligations to the pension scheme in respect of the annual payments in and the additional payments required to bring funding up to 100% in a suitable period, but I cannot assume that this will continue into the future.
So for anyone who has any concerns about their final salary scheme;
- If you have lost contact with a previous pension scheme, use the Pension Tracing service to find it.
- Make sure the administrators of the scheme have your current address and contact details
- Make sure you have a recent expression of wish on file; ex-wives and estranged children might benefit from your demise otherwise.
- Check the annual pension statement for your anticipated benefit at your Normal Retirement Age.
- Check the Trustee’s report for the level of current funding and any plans to modify funding in the near future.
- Keep track of the sponsoring employer’s business performance as a business failure or hostile takeover may have an adverse effect on your pension scheme.
- Keep an eye on the people being appointed as member trustees. Although trustees have a duty to the membership as a whole, these duties may not align with your personal interests.
- Visit the Pension Protection Fund website to understand what may be available in the event of a pension disaster, http://www.pensionprotectionfund.org.uk/Pages/homepage.aspx.
- Talk to your advisor to see what options are available for your pension income from all sources.
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.