Final Salary Guarantees & Scheme Wind Ups

Final Salary Guarantees

It is important to understand that contrary to popular belief, company Final Salary Pension Scheme benefits are not "guaranteed". It is effectively a promise from the sponsoring employer to contribute enough money into the pension scheme now and in the future to provide the pension calculated at retirement. Problems have arisen where the escalating cost of providing for the pension scheme has become so cumbersome that the employer can no longer afford to prop up the fund.

There have been a number of recent Final Salary disasters where members have had contributed to the scheme for their whole career to find that when their employer recently became insolvent, not only were they now redundant but the pension they were expecting to receive at retirement was nothing like what they were actually going to receive. It is wrong to give you the impression that this is commonplace, however, underfunded pension schemes do exist and your scheme's current funding level is one of the important factors that a pension transfer specialist will need to consider in giving you advice.

Final Salary Pension Scheme Wind Up

One of the main topical points at the moment is for companies to close their final salary pension schemes and change to money purchase schemes. These are typically due to both an increased cost of administering the scheme as well as having to provide additional funds to prop up the scheme. For example;

  • In 1997 the government introduced 10% tax on dividends earned by pension schemes, these dividends play an important element of the schemes long-term health and this taxation has caused huge disruption.
  • A new accounting practice FRS17, has caused concern amongst company accountants, as it requires employers to be more transparent about the pension schemes liabilities.
  • During the last few decades the age people are expected to live to has drastically increased, pensions scheme will therefore have to pay pensions for a longer period of time.
  • Companies no longer want the liability of operating a final salary pension scheme. Ongoing costs including running the schemes administration, paying employer contributions and absorbing the pension funds "ups and downs" on the stock market.

If a company changes its scheme to a money purchase arrangement the majority of the issues highlighted above are removed, this ultimately saves the employer a lot of money.