Company Switching to Money Purchase Scheme

Dick_here

We've been told this week that our company pension scheme is going to switch to Money Purchase (from Career Average). Only a few years ago it went from Final Salary to CA

The company will pay in 2% for each 1% we contribute, up to a max of 10% on their side. We can contribute more than 5% if we wish of course. We've been told we can still use Salary Sacrifice for this, which would reduce our 5% to 4.75%. Previously, I've been paying 6.75% into the CA scheme for an accrual rate at 1/60ths per year of service, I think their contribution has been slightly more but less than 10% (they say it would need to rise significantly to make up the scheme deficit and they can't sustain that).

Also, an MP scheme isn't allowed to be contracted out of S2P we're told, so we'll see our NI contributions increase by 1.4% (that has been quietly slipped into the info supplied), which means approaching an extra £40pm gone from my salary before thinking of pension contributions.

My questions...

1) any idea how much I might need to pay in to have some chance of matching the CA pension scheme ? I'm 48 btw

2) should the company offer/be made to cover the NI increase by increasing our salary accordingly (as it's entirely down to them that this is happening) ?

3) where does the AVC I've been paying fit in, does that now cease and form part of the MP pot I'll be building up ?

4) could the Trustees simply refuse to accept this switch of scheme ?

Any other thoughts from anyone welcomed whose got more expertise in this area or has been through this.

How does this switch seem in comparison to others ? I get the feeling that we're not being offered much, but is that fair or just wishful thinking and I'm out of touch with the market reality ?

Thanks all.

somethingcorporate

To someone with no pension £2 for every £1 you put in that actually only costs you 60p or 80p in your pocket (depending on how much you earn) is a pretty amazing deal.

Not many places you can get a 400% return on your money.

However, stepping down from a CA and FS evidently this is not going to be quite as attractive although still very generous compared to most people.

Have a play with the pension calculator here to see how much you need to put in to get a reasonable level out. There are a number of factors to compare with a CA/FS scheme so it it not really straight forward.

Whatever the company contribute towards the CA scheme is largely irrelevant as any shortfall in investment performance needs to be made up by the company to match the pension obligations so it is a bit of a red herring. Generally speaking, for FS it tends to require a contribution of 20-35% of salary in MP to match the FS benefits, I am guessing for a CA it would be at the lower end of this scale.

Dick_here

somethingcorporate wrote: »

There are a number of factors to compare with a CA/FS scheme so it it not really straight forward.

Whatever the company contribute towards the CA scheme is largely irrelevant as any shortfall in investment performance needs to be made up by the company to match the pension obligations so it is a bit of a red herring. Generally speaking, for FS it tends to require a contribution of 20-35% of salary in MP to match the FS benefits, I am guessing for a CA it would be at the lower end of this scale.

Yes thanks, I was wondering whether they should be offering to pay for us to seek IFA advice.

They say they've been contributing 8.1% to the CA scheme but to be able to fully support it in the future it needs to be 16.5% which they're unwilling to sustain. By offering a max of 10% for anyone who wishes to contribute at least 5% themselves they emphasize that it's an improvement on their current 8.1%, but of course the risk is being shifted onto us instead. Can they just decide to give up on their responsibilities as easily as that ?

mgdavid

!!!!!!_here wrote: »

Yes thanks, I was wondering whether they should be offering to pay for us to seek IFA advice.

They say they've been contributing 8.1% to the CA scheme but to be able to fully support it in the future it needs to be 16.5% which they're unwilling to sustain. By offering a max of 10% for anyone who wishes to contribute at least 5% themselves they emphasize that it's an improvement on their current 8.1%, but of course the risk is being shifted onto us instead. Can they just decide to give up on their responsibilities as easily as that ?

broadly, yes - or the alternative might be profit turns to loss, company goes bust, sells up or closes, no more job!

somethingcorporate

!!!!!!_here wrote: »

Yes thanks, I was wondering whether they should be offering to pay for us to seek IFA advice.

They say they've been contributing 8.1% to the CA scheme but to be able to fully support it in the future it needs to be 16.5% which they're unwilling to sustain. By offering a max of 10% for anyone who wishes to contribute at least 5% themselves they emphasize that it's an improvement on their current 8.1%, but of course the risk is being shifted onto us instead. Can they just decide to give up on their responsibilities as easily as that ?

Unfortunately I think they can

kidmugsy

!!!!!!_here wrote: »

They say they've been contributing 8.1% to the CA scheme but to be able to fully support it in the future it needs to be 16.5% which they're unwilling to sustain.

That sounds about right. The University scheme USS has recently swapped from Final Salary to Career-Averaged: their website says "your employer currently pays a monthly contribution equal to 16% of your salary, while you pay 6.5%". They pay out in 1/80ths plus a lump sum.

kidmugsy

!!!!!!_here wrote: »

We've been told we can still use Salary Sacrifice for this, which would reduce our 5% to 4.75%.

I'm surprised: I'd expect you to save 20% income tax, 12% National Insurance Contribution, plus any share of the employer's NI contribution that he's prepared to direct to you.

Dick_here

kidmugsy wrote: »

I'm surprised: I'd expect you to save 20% income tax, 12% National Insurance Contribution, plus any share of the employer's NI contribution that he's prepared to direct to you.

So are you saying that Salary Sacrifice should equate to more than .25% ? We've only ever received that amount, and that was whilst contracted out, I always wondered how much they were saving and not being passed onto us !

Perhaps I'm tangling two discrete things here now ? One, contracting out of S2P which we'll no longer be doing - costing us £40pm from our salary. Two, any benefit from Salary Sacrifice - we'll still be getting .25% reduction in contribution cost, does anyone know how much the company is saving and not passing onto us though ?

kidmugsy

!!!!!!_here wrote: »

any benefit from Salary Sacrifice - we'll still be getting .25% reduction in contribution cost, does anyone know how much the company is saving and not passing onto us though ?

Your income tax and own NIC benefits show up as decreased deductions from your pay: in that sense your 5% costs you far less than a 5% pay reduction, namely 3.4% (if your income tax rate is 20%). It sounds as if the 0.25% is your share of the employer's saving which, I take it, goes straight into your pension. Some employers hand over more; not only does it help keep the staff sweet, it may encourage more of them to save in this way and therefore end up saving the employer more NICs in total.

mania112

If you are sacrificing 5% of your salary to put 5% (of what salary would have been) into a pension - the savings are fixed, there shouldn't be any confusion, should there?

You're getting paid 5% less, so you're saving 20% of 5% in Income Tax (or 40%/50%) and 11% NIC (or whatever the level is).

Your company are also saving on NIC

jamesd

!!!!!!_here wrote: »

The company will pay in 2% for each 1% we contribute, up to a max of 10% on their side. We can contribute more than 5% if we wish of course. We've been told we can still use Salary Sacrifice for this, which would reduce our 5% to 4.75%.

As private defined contribution schemes go that's a good deal and other than thinking about what you're losing, you've reason to be happy with the amount they are willing to pay and the use of salary sacrifice.

!!!!!!_here wrote: »

Also, an MP scheme isn't allowed to be contracted out of S2P we're told, so we'll see our NI contributions increase by 1.4% (that has been quietly slipped into the info supplied), which means approaching an extra £40pm gone from my salary before thinking of pension contributions.

The current government abolished contracting out for those in defined contribution schemes from April 2012 and has announced as part of its flat rate cut in pensions for employees that it will also be eliminating them for defined benefit schemes in a few years.

!!!!!!_here wrote: »

1) any idea how much I might need to pay in to have some chance of matching the CA pension scheme ? I'm 48 btw

Use a pension calculator. More is going to be the answer. Likely 25% or more of your income.

!!!!!!_here wrote: »

2) should the company offer/be made to cover the NI increase by increasing our salary accordingly (as it's entirely down to them that this is happening) ?

That's generally impossible and it's not realy fair to the company because the government is also going to eliminate it from DC schemes soon anyway.

!!!!!!_here wrote: »

3) where does the AVC I've been paying fit in, does that now cease and form part of the MP pot I'll be building up ?

Depends how the trustees and company decide to do it, it could go wither way. Usually AVCs have lower costs and low or no investment choices. depending on how capable an investor you are it could be better either way.

!!!!!!_here wrote: »

4) could the Trustees simply refuse to accept this switch of scheme ?

No.

!!!!!!_here wrote: »

Any other thoughts from anyone welcomed whose got more expertise in this area or has been through this.

Find out what part, if any, of the saved employer NI is paid into the pension pots of the employees. It's common for employers to share half, none or all of it.

!!!!!!_here wrote: »

I get the feeling that we're not being offered much, but is that fair or just wishful thinking and I'm out of touch with the market reality ?

You're out of touch with market reality. The offer is good compared to most in the private sector. still tough for you to lose a better scheme but you're not being treated badly, rather, well.