Pension changing what does this mean?

shamac

My company pension scheme is changing from Defined Benefit to Defined Contribution. Can someone please explain what this actually means? Thanks.

chris_m

Instead of being a final salary scheme, where you get a pension based simply on your final salary at retirement and years of service, you get a "pot" which you then use to buy an annuity (or similar) which pays the pension based on the amount put in and your estimated lifespan.

It's possible that benefits already earned will be protected, so if you've already got a lot of years in it may not be as bad as it appears at first look. You need to check the details.

atush

I agree, hopefully all your past years should be protected. This means at least part of your pension will be based this way.

FS pensions are very very expensive for companies to run so they are getting rid of them. Going forward your pension wont be as good but most companies doing this have high employers contribs so that will help.

ermine

someone please explain what this actually means?

What the others said, plus, basically, you are taking the shaft. The more so the younger you are/more years of contributions you have ahead of you

xylophone

shamac wrote: »

My company pension scheme is changing from Defined Benefit to Defined Contribution. Can someone please explain what this actually means? Thanks.

I am very surprised that you have to ask this question on an internet forum.
Surely to goodness your employers have explained exactly what it means and have provided all employees with details of their protected/preserved benefits under the old scheme and the changes that will occur as a result of the new?

If not, why not? Have you contacted HR/the Pension Scheme Trustees?

jamesd

This means that instead of being dependent on pay and number of years of service with your employer taking all investment and longevity (how long you live) risk, you'll be getting a set amount of money based on your pay that is invested in ways that you can control. You then decide how to take an income from that when you retire, either by buying an annuity or leaving the money invested in ways that produce an income.

The main benefit is usually to the employer, which no longer has some big risks, which instead are now taken by the employees instead. Many employers also use this time as an opportunity to reduce the amount of money that they pay into a pension. For a final salary scheme they might typically end up paying in over 20% of your pay. For defined contribution schemes it's more likely to be 4-10%. One thing that you or your representatives should ask is whether the employer contribution to the pension is remaining the same or not, trying to keep it the same.

Whether this is good or bad depends on how high the employer contributions are, how well your chosen investments do and whether you end up single or not, since it can benefit single people.

Usually the employer is looking to reduce pension contributions significantly. That can be beneficial to new employees or even existing ones if it shows up as higher raw pay, which the employee can then choose how to use instead of being forced to have it used for pension contributions. But it's very unlikely that it would show up as higher pay for existing employees!

It's also potentially significant for your employment contract. If your contract specifies certain pension terms then this is a change of employment terms.

This is an ongoing trend and most companies with final salary schemes can be expected to close them to existing members over the next few years, with most already having closed them to new employees.