Final salary pension plan to close - Help!

Mado

Help Please!!!!

The company I work for had a final salary pension scheme when I joined.
They closed it to new entrants about 5 years ago and now I have heard rumours that they will scrap it altogether.

How does it work for future pensioners who have already left the company?
If I left the company before they close it, would I be entitled to the final salary portion of the years I have been contributing or would I get a lump sum of my contributions?

MikeJones_2

Hi mado,

There are 3 main categories of a defined benefit pension scheme:

Active Member
An active member of a pension scheme is someone who is continuing to build up further pension benefit in respect of service being completed.

Preserved Member (also called a ‘deferred member’)
A preserved member is someone who has built up benefits in a pension scheme and who has:
- ceased to be an active member,
- is not receiving pension benefit, and
- has not transferred those benefits to another pension arrangement.

Pensioner Member
A pensioner member is someone who is in receipt of their pension benefit (other than some forms of ill-health).

Your query
If the sponsoring employer of your defined benefit pension scheme closes the scheme to future accrual there will only be preserved members and pensioner members left in the scheme.

As a preserved member your preserved benefits will be calculated using the formula that the scheme uses. An example of the formula for a 'final salary' type scheme (which is one type of defined benefit scheme) would be:

length of pensionable service x final pensionable salary
accrual rate

The definitions of pensionable salary (e.g. does it include overtime, bonues etc) and final pensionable salary (e.g. average of last 3 years pensionable salary etc) would be contained in the scheme rules.

NOTE: For a preserved member your final pensionable salary is the one that is calculated as at the date you ceased to be an active member.

Your preserved pension would not be frozen because present legislation partially protects it. It would revalue (increase) between the date you ceased to be an active member and your Normal Retirement Date. Conceivably, your preserved pension at the date you ceased to be an active member could be split into different slices with different slices receiving different rates of revaluation (pension increases up to your NRD). For example, any pension you have earned since 6/4/1997 in a contracted out defined benefit scheme would revalue by 5% p.a. compound or RPI if lower, until your NRD.

If you leave the company before they close it, and you have over two years pensionable service you would be entitled to:
(a) leave it preserved in the scheme
(b) take a transfer value to another register pension scheme

If you leave it preserved you can draw it under whatever circumstances the scheme rules entitle you to (e.g. NRD, early payment, ill health etc)

With over two years pensionable service you would not be entitled to a refund of your contributions.

Consider taking advice from an IFA and one that specialises in pensions with particular experience with defined benefit schemes (ask if your employer will pay/provide for access to advice through an IFA).

If you are concerned about your pension scheme there are some Factsheets about Security and Risk here that might enlighten you.

I hope this helps.

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Mado

Thanks Mike.
It's very useful.

Just to confirm though, does the pension fund have a right to change the rules for preserved members and say something along the lines of "you will no longer receive a monthly/yearly pension, but a lump sum instead"?

MikeJones_2

Hi Mado,

Mado wrote: »

Just to confirm though, does the pension fund have a right to change the rules for preserved members and say something along the lines of "you will no longer receive a monthly/yearly pension, but a lump sum instead"?

If you cease to be an active member you will become a preserved member which I have described in a previous thread in some detail.

Once you have 'accrued' (earned) a benefit it cannot be taken away (other than in the most exceptional of circumstances which I won't go into here).

I hope this helps to clarify your query. Would you mind posting an update when you get a reply from your pension scheme administrators about how the scheme treats your final pensionable salary upon your change from full time to part time service?

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

jonathon_hart

Hi.

If they close the scheme to future accrual they will make you a preserved member as Mike states above.

If they wish to they can wind up the scheme (just because they close the scheme does not automatically mean that they will do this) - if that was to happen then you would be forced to transfer your benefits.

cherry_l

Hi all

I really hope you could help me with this. I agree that for a preserved member your final pensionable salary is the one that is calculated as at the date you ceased to be an active member.

Is there any case law/legislation/regulation/etc you can point me to as an authority for this point? I have tried everything from Westlaw Lexis to Google and still cannot come up with anything to support this.

Many thanks!

Cherry

MikeJones_2

Hi cherry_l,

If you are refering to a defined benefit scheme, the Scheme Rules will state:

(a) the formula it uses to calculate a preserved benefit and

(b) the definitions of each element of the formula.

The scheme can provide whatever it likes so long as:

(i) it conforms to the Scheme Rules and

(ii) it is within HMRC limits

In the strictest sense of the law, a scheme can actually pay more than HMRC limits but it would then be in breach of HMRC rules and as such suffer the consequences laid down in HMRC's rules.

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Debt_Free_Chick

cherry_l wrote: »

Hi all

I really hope you could help me with this. I agree that for a preserved member your final pensionable salary is the one that is calculated as at the date you ceased to be an active member.

Is there any case law/legislation/regulation/etc you can point me to as an authority for this point? I have tried everything from Westlaw Lexis to Google and still cannot come up with anything to support this.

Many thanks!

Cherry

Firstly, the rules of the scheme will give you that entitlement so take a look there.

Secondly, you are entitled to what used to be called a Short Service Benefit (SSB). This was first introduced in Social Security Act 1973 - the original version doesn't seem to be online, but it's since been repealed anyway. SSB basically meant that leavers had to be entitled to what they'd built up, up to the date of leaving and that their entitlement should be calculated in the same way as someone retiring at normal retirement date (NRD), but with the date of leaving replacing NRD.

So ... the calculation of a deferred pension should use the same formula as applies at NRA, but with every element using the date of leaving instead of NRA. It then follows that you simply use pensionable service up to the date of leaving and final salary at the date of leaving.

The old provisions of SSA 1973 were replaced by Pension Schemes Act 1993. You want Part IV which is here, especially section 74.

I'm not sure if PA1993 has since been consolidated into a later act or not (my current employer won't pay the subscription for the database!!), but I don't think it has. It hasn't yet been updated on the Statute Law Database either.

Anyway .... the original reference was SSA1973, repealed by PSA1993 and that should be enough.

Do you have a dispute? Or is this just idle curiosity?

cherry_l

Hi Mike and Debt_Free_Chick thanks for your replies! They have been helpful.

I was asking the question because I was doing an essay.

Cheers!