How secure is my defined benefit scheme? – Pensioner Member
This Factsheet presents some of the main issues relating to the security of your pension and how this can affect your retirement benefits.
It is written for people with a pension benefit currently in payment from a defined benefit scheme. As a pensioner member you may have retired from work, or begun taking your pension from a previous employer whilst working with another.
Introduction
This Factsheet looks at some of the issues about the security of your pension that YOU should know and understand as the security of your pension scheme will affect YOU and your dependants. This Factsheet is designed to make you think about the various issues associated with security, WHY these occur and HOW these could have a bearing upon your pension benefits.
It is primarily written for pensioner members whose benefits are paid for out of the schemes assets (rather than those whose pension benefits have been secured by the scheme buying your pension with an insurance company). Different considerations apply where your pension has been bought out with an insurance company.
Some of the points are more obvious than others, but they are all important.
If you are intending to get advice from a Financial Adviser these are some of the things you should be discussing with them.
How secure is my pension?
Until quite recently, most members of traditional ‘company pension schemes’ (what we call defined benefit schemes) would have considered their pension benefits to be guaranteed. It’s not too difficult to understand how this happened. The vast majority of members retiring from defined benefit schemes over the last 30 to 40 years received the full benefits they were expecting (and sometimes more).
Large surpluses, contribution holidays and buoyant stock markets all led to a sense of security. Brochures, documents and leaflets provided by many pension schemes, Government organisations and Financial Services regulators sometimes referred to the guaranteed nature of salary-related occupational pension schemes.
Sometimes these specifically stated that defined benefit schemes provided guaranteed pension benefits. Quite often, the guaranteed nature of these schemes was implied. If you go searching on the internet, it is not too difficult to find websites which continue to state – incorrectly - that defined benefit schemes provide guaranteed pensions!
Comment
Defined benefit schemes provide a promise – which is not a guarantee.
The promise is valid only as long as the sponsoring employer supporting it is able to (or chooses to) keep that promise.
As a pensioner member, it is important you understand what level of security you have, as well as any risks that you face which could affect your pension scheme and the benefits it is providing you with (as well as those which it has promised to provide, e.g. dependents pensions upon your death).
The difference between private and Public Sector pension schemes
Private sector pension schemes are funded by a sponsoring employer. The employer pays contributions, and in the majority of those schemes, the members also pay contributions, which maintain the scheme and help pay pensions to retired scheme members.
Public Sector pension schemes can be divided into two types:
- ‘funded’ pension schemes (e.g. Local Government Pension Scheme)
- ‘unfunded’ pension schemes (e.g. NHS, Civil Service and Teachers’ Pension Scheme).
Funded public sector pension schemes are broadly similar to private sector schemes in that they also build up assets to meet the cost of paying pension benefits, but these benefits still rely on the promise and are therefore technically not guaranteed. However, it is unlikely that the Government would allow the Local Authorities, for example, to default on this promise (yet!).
Unfunded public sector pension schemes have, as the name suggests, no physical ‘fund’ or ‘pot’. The sponsoring employer – the Government – doesn’t make contributions. Any contributions paid by the members of unfunded pension schemes pass into the general Government ‘kitty’ (but these figures are recorded for each member and taken into account in pension calculations). The schemes rely on a promise by Government to pay pension benefits. There is no build up of assets to provide further member security.
What is a ‘Crown Guarantee’?
A Crown Guarantee (CG) is where Government has undertaken to guarantee the pensions benefits of certain companies in the event that the employer goes bust. These guarantees were generally made as a result of privatisation in the eighties and nineties, and include pension schemes (or sections of schemes) such as BT and British Coal. In the last year, the CG has become a major issue for these companies. Where the guarantee applies in relation to a part of the scheme membership, the levy due to the Pension Protection Fund is reduced. Needless to say, some current private companies have been working through privatisation papers to see if they might benefit from a CG.
The Pension Protection Fund has confirmed that it is aware of up to 20 schemes with such guarantees. If one of these schemes fail, then the taxpayer will ultimately be called upon to meet those liabilities specified as a result of the Crown guarantee.
Summary & Key Points
When making enquiries about your pension benefit it is very important that you make it clear that you are a pensioner member rather than an active member or a preserved member. Active, preserved and pensioner are different classes of membership of a pension scheme and any definitions and paragraphs contained within your Scheme Rules or scheme literature relating to any benefit may differ considerably between these categories.
You need to consider the following items:
- Is your pension scheme a funded pension scheme or unfunded?
- If your pension scheme is funded, is it in deficit? How big is the deficit?
- How secure is your pension scheme’s sponsoring employer?
- If your pension scheme failed, would you be eligible for (and what would you get) from the Pension Protection Fund?
- Keep informed. Your scheme may modify benefits and Rules. Legislation may change. Your circumstances may alter.
- Rules differ from scheme to scheme and are wide and varied in content. Don’t assume that what applies to one of your pension schemes will necessarily apply to others that you may have.
- HMRC impose rules which registered pension schemes must conform to.
- People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
How secure is my defined benefit scheme? v1.2 Pensioner
Last updated 13/12/2006
