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21st November 2019
:: Scheme Member | Types of Pension Scheme | What is a hybrid scheme? | Active members of a MP scheme

What is a Hybrid Scheme? – Active Members
 
This Quicknote describes what a hybrid scheme is.
 
 
 
Introduction
 
There are many types of pension scheme offered by employers for their employees. This Quicknote summary should provide you with a brief explanation of what a ‘hybrid’ pension scheme is. For a more detailed description of the main types of scheme, please see our Factsheet Types of employer sponsored pension schemes.
 
 
What is a hybrid scheme?
 
A hybrid scheme is a defined benefit scheme, which includes elements of money purchase pension design.
 
In a defined benefit scheme your pension scheme will use a formula, to calculate your pension benefits using 4 key elements. The formula (and the definitions for each part of it) will be set out in the Scheme Rules.
 
A money purchase scheme provides benefits based upon the amount of money that is in YOUR own pension ‘pot’ when benefits are due to be paid. See our Factsheet, What is a money purchase scheme?
 
Hybrid arrangements come in many forms, but there are two common themes.
 
 
Sequential hybrid scheme (commonly called ‘nursery schemes’)
 
A sequential hybrid pension scheme, is where one specific type of pension benefit is accumulated first and is then followed by the second pension arrangement.
 
An example sequential hybrid scheme
  • An employer provides the scheme members with ‘money purchase benefits’ until say, age 45, which are then held until the benefits are due.
  • Thereafter, scheme members accumulate their pension benefits in the form of ‘defined benefits’.
When benefits become due (retirement, death etc), members (or their dependents) get both the ‘money purchase’ and the ‘defined benefit’ provisions.
 
It is possible that this type of arrangement may now be challenged in the Courts under Age Discrimination Regulations, the pensions aspects of which became effective from 1st December 2006.
 
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Combination hybrid scheme
 
A combination hybrid pension scheme can be where pension benefits are built up at the same time in both defined benefit and money purchase elements of the pension scheme.
 
An example combination hybrid scheme
  • an employer offers scheme members pension benefits based upon defined benefits up to a salary ‘cap’ of say, £30,000 p.a.
      plus
  • for members whose salary is greater than this amount, additional money purchase benefits are accumulated in a separate ‘pot’ (the contributions to that part of the scheme would normally be based upon earnings above whatever salary ‘cap’ had been specified).
 
There are many variations to combination hybrid schemes.
 
 
Summary
 
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 Quicknote forms part of our Module Types of pension scheme and should be read alongside the other Factsheets and Quicknotes in the series.
 
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
 
 
What is a hybrid scheme v3.1 Generic
Last updated 22/12/2006
Last reviewed 18/06/2007
 
 
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