Cash Clinic: Pensions pain as firms are forced to cut their cloth

I work for a large manufacturing company and have been a member of its final salary pension scheme since I joined some 20 years ago. The firm is currently restructuring its pensions offering and I am keen to establish its motives and how this might impact my pension position.

TA, Glenrothes

Companies have in the past offered their employees the opportunity to join their final salary (also known as defined benefit) pension scheme. Based on a prescribed formula members stand to receive a pension in retirement based on their length of service or an equivalent pension in line with their career average earnings.

Today, final salary schemes have largely been replaced with money purchase schemes, the main difference being that a money purchase pension does not offer a guaranteed pension in retirement. The retirement income is plainly subject to the total contribution level, the underlying investment performance and the government annuity rates at the time of retirement.

Restructuring of company final salary pension schemes has become more common as companies try to reduce costs and pass the contingent risks on to the individual scheme members.

The main reason for companies wishing to restructure their pension schemes is the rising costs as a result of individuals living longer and poor investment returns. More often than not a combination of both factors makes final salary or career average pension schemes unmanageable.

Companies take remedial measures in order to mitigate rising costs but also move the underlying risks and liabilities to the respective scheme members. Employees need to be aware of the risks, and more importantly members must realise that transferring out of a final salary scheme is rarely in their best interest.

It is very rare nowadays to find an employer that will accept new entrants to an existing final salary scheme and in many instances companies have stopped accruals for existing members.

The most drastic measure companies can take is to wind up their final salary scheme and offer the existing members incentives to transfer out to an alternative money purchase arrangement.

Because employees stand to receive less by transferring out of a final salary scheme they are offered incentives which can include cash payments as well as enhanced transfer values. Members must consider all incentives, the risks, and the fact that the (enhanced) transfer values offered may not be reflective of the benefits they are giving up.In any event members should seek independent financial advice in order to review all options available to them.

• Christian Poziemski is a wealth manager at HBJ Gateley Wareing

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.