Final Salary Guarantees

Final Salary Guarantees
It is important to understand that 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. One of the more recent Final Salary disasters involved the ASW Pension Scheme. One member of the scheme interviewed on television explained how he had contributed to the scheme for nearly 30 years only to find that not only had he been made redundant but the pension he had realistically expected at retirement was nothing like what he was going to receive. This case unfortunately highlights how an employer could under fund your pension without breaking the law. It is important to note that this is relatively unusual; most companies would choose to wind up their pension scheme before it reached this stage.

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. Some companies have decided to change for a number of reasons, for example;

• In 1997 the government removed the facility for pension schemes to reclaim the 10% tax on dividends earned by their funds. These dividends form an important element of the scheme's 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 their 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.

High profile employers who have taken this step include Boots, Marks & Spencer and Barclays Bank. Companies no longer want the liability of operating a final salary pension scheme. Ongoing costs including running the scheme's administration, paying employer contributions and absorbing the pension funds "ups and downs" on the stock market.

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To visit the Pension Protection Fund website and get more information on scheme wind ups click here.

This site is for information only and does not constitute financial advice.