My employer is looking to make pension changes

mikey1999

I've got a few questions that someone may be able to help with.

As a bit of background my company is proposing to keep the final salary scheme for present employees but cap pensionable pay rises to rpi +0.5%.

The scheme will be closed to new employees, who will be offered a defined contribution scheme instead.

Some questions I have...

1. The company is using potential funding figures that assume huge deficits in the final salary scheme which presently has a (very small) surplus. Is this realistic or are figures being used to justify proposals?

2. What sort of deficits do other companies generally run as standard and how do they deal with it?

3. Potential deficits are far greater with trustee valuations than projected with company accounts. The company says it is more prudent to use the pessimistic figures. Is this normal?

4. The final salary scheme has a 9% contribution rate from the company and 6% from the employee. The defined contribution scheme will be up to 18% from the company and 9% from the employee (or 2 to 1 ratio below that). What potential future impacts are there with these figures for both schemes and potential payouts?

5. Smart pensions are being introduced which the company say will save the 0.8% of pensionable payroll. My understanding was that NI was saved on contributions so is 0.8% realistic or an under assessment?



Thanks in advance!

MikeJones_2

mikey1999 wrote: »

As a bit of background my company is proposing to keep the final salary scheme for present employees but cap pensionable pay rises to rpi +0.5%.

For employees who remain in the defined benefit section, they will need to fully understand WHAT they will get at retirement then, particularly when actual salary is higher than pensionable salary. It all depends on what your Scheme Rules will define as pensionable pay and final pensionable pay.

mikey1999 wrote: »

The scheme will be closed to new employees, who will be offered a defined contribution scheme instead.

Any of the pension benefits already earned in the defined benefit scheme will be 'protected'. They can only alter the 'future' (so far unearned) part of your defined benefit pension.

mikey1999 wrote: »

1. The company is using potential funding figures that assume huge deficits in the final salary scheme which presently has a (very small) surplus. Is this realistic or are figures being used to justify proposals?

Defined benefit schemes must have triennial reviews at the very least. Many will have more regular reviews than the legal requirement - particularly with the current economic situation. Hence, if your scheme was in surplus and hasn't done a review for say two and a half years, it wouldn't be surprising to find that at the next review it has moved into deficit. It all depends upon where the pension funds assets are invested. There is also the issue of increased life expectancy on defined benefit schemes.

mikey1999 wrote: »

2. What sort of deficits do other companies generally run as standard and how do they deal with it?

The Pension Protection Fund produces a monthly bulletin measuring the solvency position for 7800 defined benefit schemes. The November 2008 bulletin revealed that:

The total deficit of schemes in deficit in October 2008 is estimated to have worsened to £122.1 billion from £113.5 billion at the end of September 2008 (Chart 3 and Chart 4). In October 2007, the aggregate deficit of all schemes in deficit stood at £36.9 billion.

I can't think why any sponsoring employer would intentionally run its scheme into deficit. There are risk-based levies to pay to The Pensions Regulator (TPR) and trustees must consider the strength of the covenant between the employer and the pension scheme.

TPR recently issued this Factsheet, which you might find useful:
Statement issued to trustees on current market conditions

mikey1999 wrote: »

3. Potential deficits are far greater with trustee valuations than projected with company accounts. The company says it is more prudent to use the pessimistic figures. Is this normal?

A sponsoring employer won't want to show poor accounts if it has any borrowings or if it intends to pay dividends to shareholders.

It is the Trustees' duty to look after the best interests of the scheme members, and part of that might be to take a more pessimistic view than the sponsoring employer is prepared to.

It's all about balancing the interests of the members with the employer. It's of little use to existing employees in the defined benefit section to have a pension and no job!

See TPR's Conflicts of interest factsheet.

mikey1999 wrote: »

4. The final salary scheme has a 9% contribution rate from the company and 6% from the employee. The defined contribution scheme will be up to 18% from the company and 9% from the employee (or 2 to 1 ratio below that). What potential future impacts are there with these figures for both schemes and potential payouts?

In the current climate where employers are facing a drop in sales, increased life expectancy and sagging investment performance (in many sectors and asset classes), many employers are facing quite dramatic hikes to existing employer contribution rates. It is not unusual to find employers currently paying 25-30% as an employer contribution to a defined benefit scheme - in addition to substantial monthly payments to fill any existing deficit in the scheme.

mikey1999 wrote: »

5. Smart pensions are being introduced which the company say will save the 0.8% of pensionable payroll. My understanding was that NI was saved on contributions so is 0.8% realistic or an under assessment?

Smart pensions. Can you elaborate - do you mean 'salary sacrifice'?

Hope this helps. Sorry for the lengthy reply.

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.

mikey1999

Mike,

Thanks very much for taking the time to reply, I was sort of hoping you'd be shouting 'thieving management barestewards' but it's always good to get an opinion from outside especially as our union are fully supporting these proposals.

I've got a couple more questions if I can...


1) The contributions the company makes under the defined benefit scheme are still accessible to the business if they need to draw on them in the event of financial strife, is that correct?

2) However, it seems defined contribution schemes allow the employee to remove the companies contributions and invest them beyond the reach of a failing business, is this correct?

3) We've had pay rises averaging 2% above RPI for the past few years so is it fair to say we're no longer on a final salary scheme? My rough calculations show over 40 years a 2/3rds schemes becomes more like a 1/2 pay scheme if you limit pensionable pay to .5% over rpi with an average pay rise of 2% above rpi.

4) It also seems that with the company offering a defined contribution rate of up to 18% of pensionable pay on a 2:1 ration with the employees contributions then the pension pots of those on the defined contribution scheme could dwarf those on the final salary scheme. Would you agree with this?


Thanks for the advice.

mikey1999

Mike,

The 'smart pensions' is indeed salary sacrifice.

I've googled the potential savings to employers but can't really get an answer beyond savings of NI contributions which I would have thought would have amounted to a little more than the 0.8% of pensionable payroll.

MikeJones_2

Hi Mikey,

First of all, and sorry to be pedantic, but I'm keen for you to understand that my reply to your original post does not contain advice of any kind - rather it contained factual information and guidance.

Now to your additional questions:

mikey1999 wrote: »

...I was sort of hoping you'd be shouting 'thieving management barestewards'...

I suspect many employers that provide defined benefit schemes would dearly like to continue with and maintain them for their employees, except that for many it is difficult to reconcile the ever-growing financial risks and burdensome regulation and legislation of running this type of retirement benefit.

mikey1999 wrote: »

...1) The contributions the company makes under the defined benefit scheme are still accessible to the business if they need to draw on them in the event of financial strife, is that correct?...

No. Once paid over the employer's contributions form part of the defined benefit scheme's assets.

mikey1999 wrote: »

...2) However, it seems defined contribution schemes allow the employee to remove the companies contributions and invest them beyond the reach of a failing business, is this correct?...

Defined benefit schemes and defined contribution schemes are both registered pension schemes (a definition introduced by HMRC with effect from 6th April 2006). There are strict rules which apply to contributions made to registered pension schemes whether employer or employee and once paid over to the scheme they are effectively beyond the reach of a failing business.

mikey1999 wrote: »

...3) We've had pay rises averaging 2% above RPI for the past few years so is it fair to say we're no longer on a final salary scheme? My rough calculations show over 40 years a 2/3rds schemes becomes more like a 1/2 pay scheme if you limit pensionable pay to .5% over rpi with an average pay rise of 2% above rpi....

If your scheme hasn't made the change yet (as you described in your original post), then it remains a final salary scheme so long as your pension is based upon the formula prescribed in the Scheme Rules an example of which would be:

pensionable service x final pensionable salary
.....accrual rate

mikey1999 wrote: »

...4) It also seems that with the company offering a defined contribution rate of up to 18% of pensionable pay on a 2:1 ration with the employees contributions then the pension pots of those on the defined contribution scheme could dwarf those on the final salary scheme. Would you agree with this?...

With an employer sponsored defined contribution scheme (a.k.a. money purchase scheme), your ‘pot’ will usually consist of -

employer contributions
plus
YOUR contributions
plus
investment returns
less
charges

What is in your ‘pot’ at retirement will be used to provide you with your pension benefits.

So, it is very difficult to quantify precisely what you will get other than using standard projections.

mikey1999 wrote: »

...Thanks for the advice.

Most welcome. Hope this last lot helps too.

Mike

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.

mikey1999

Mike,

Thanks for the factual information and guidance , it's genuinely appreciated.

It would seem that the companies proposals are not unreasonable in the context of where final salary schemes are.

Maybe focussing on the 15 year rpi cap (no reviews) is a more realistic approach for the employees.

Any recovery of the scheme or takeover by another company should provide a break in this agreement imo otherwise we could be in a position of a scheme being in great shape in the future without the ability for us to share in the improvement.

Or indeed if a new owner would want to review pension provision then we would be already negotiating from a position of weakness with an rpi cap in place.

HouseHuntr

Thanks also Mike, It's cleared up a few points for me, but also opened another can of worms for me to digest !

What worries me though Mikey is what happens after the 15 years ? I think I know exactly who you're referring to here.

What kind of protection will the older employees have when severely outnumbered by newer employees in any future ammendments to the scheme.

SS.

mikey1999

Hi SS,

Are you working for a company beginning with 'N'?

My understanding is that the 2 schemes are entirely separate and new entrants on the defined contribution scheme can have no influence over the old scheme. Additionally, the company can't discriminate in any way against members of the old scheme.

And the company is required to make good the liabilities for the old scheme even if there are no new entrants to pay contributions in to it.

Would you agree with that Mike?

MikeJones_2

Mikey,

mikey1999 wrote: »

My understanding is that the 2 schemes are entirely separate..?

If that is the case, and they are indeed two separate legal entities, then you would be correct in saying that 'new entrants on the defined contribution scheme can have no influence over the old scheme.'

mikey1999 wrote: »

Additionally, the company can't discriminate in any way against members of the old scheme...

Essentially, I believe this statement to be true but I've often wondered why if pensions are 'deferred pay', why it can be fair to provide two entirely different pension schemes - with potentially significantly different outcomes to people performing the same job. That's one for the lawyers...

mikey1999 wrote: »

And the company is required to make good the liabilities for the old scheme even if there are no new entrants to pay contributions in to it....

Absolutely true. And in fact Househuntr's post makes a point worth homing in on when he says "What kind of protection will the older employees have when severely outnumbered by newer employees in any future ammendments to the scheme."

One disadvantage of closing a final salary scheme either completely or just to new members is that the scheme will 'mature' with each passing year.

Glad to have helped.

Mike

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.

jamesd

mikey1999 wrote: »

4. The defined contribution scheme will be up to 18% from the company and 9% from the employee (or 2 to 1 ratio below that). ...

5. Smart pensions are being introduced which the company say will save the 0.8% of pensionable payroll. My understanding was that NI was saved on contributions so is 0.8% realistic or an under assessment?

18% and 9% is generous but since investment returns decide the final result it's not possible to know the final effect. The company does appear to be trying to be at least somewhat reasonable in trying to make this a not too unpleasant alternative.

The company will save employer NI of say 13% on the contributions made. It's reasonable that 13% of say the 6% of employer's contribution to the defined benefit plan would come to 0.8% since 13% of 6% is 0.78% and that is 0.8% when rounded.