Final salary pension schemes are in serious decline and there's a distinct possibility that as far as the private sector is concerned that they could disappear completely.
Because of this and the fact that the percentage of open schemes have more than halved since 2007 the Government have put forward proposals for a new form of workplace pension which has already prompted a lot of controversy.
Pensions Minister Steve Webb laid out the Department of Work & Pensions proposals for "defined ambition" pension schemes, which are designed to be more affordable for employers and provide some guarantees to workers, beyond those available in increasingly common "defined contribution" schemes.
However, one of the proposals featured in the consultation document involves changes to existing final salary and career average pensions that would have implications for those in final salary pension schemes and their spouses.
With final salary schemes, employers provide an income in retirement based on the employee's working record. This is typically 1/60th of their salary when they retire, multiplied by the number of years they have worked. In career average schemes the calculation is based on the average of their earnings over their career.
The proposal in the consultative document is that existing and new defined benefits pension schemes will be able to scrap some of the guarantees provided. For example, the scheme would no longer have to provide an income to a member's spouse if they die and would no longer have to increase payments each year in line with inflation. It might also allow employers to put back the age to which members can take their pension, to take account of longer life expectancy.
One of the questions we've been asked is: "Will this affect existing pensioners?"
Our understanding is that existing pension benefits that have already been accrued would not be affected by these proposed changes. This would mean that widowers already taking a pension from their late partner's scheme would still receive their payments and pensioners already taking final salary pensions would also see no change and payments would be made to their partner if they die first.
Also, all existing pension payments including those to widows, would continue to provide annual rises that protect payments from inflation. However, if the proposed changes became law all benefits that have been built up prior to any changes being brought in would be protected but anything thereafter would not.
So you could see the situation where an employee with 20 years service in a scheme would have 20 years of benefits under the existing rules and then if they work for a further 20 years, benefits of 20 years under the new rules. For example, half the pension would rise with inflation and the other half would remain level.
What the Government have emphasized here is that this is not compulsory. The proposals are designed to make defined benefit schemes more affordable for employers, whilst still providing a level of guaranteed income from employees. There is nothing stopping the employer carrying on providing the same level of benefits (if the employer thought they could afford this).
And another question being asked is: "Will this affect the public sector?" (where we still have 5.7 million public sector workers in defined benefits pension schemes).
Again, our understanding is that this would not because a lot of these schemes have been moved onto a career-average basis, with agreement that there would be no more changes to the pension schemes for at least 25 years.
The Minister Steve Webb is hoping to bring in the legislation during the 2014/2015 parliamentary session so if agreement is obtained then we might be looking at April 2015 for the proposals to become law.
Article written by Steve Hopkins FCII
