What is an underpin? Active Members
This Quicknote describes what an underpin 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 is an underpin. For a more detailed description of the main types of scheme, please see our Factsheet Types of employer sponsored pension schemes.
What is an underpin?
A pension scheme may have its main element as either money purchase or defined benefit, but the sponsoring employer could have chosen to give scheme members the ‘backup’ of an ‘underpin’.
In both cases (whether the main element is money purchase or defined benefit), the scheme is treated as a defined benefit scheme in the way it operates, but the underpin can be created in different ways.
In its simplest format, the underpin provides you with two alternative pensions from the same pension scheme.
Whenever you draw your pension benefits, you will get the better of the main scheme benefit or the underpin. You can have a:
- money purchase scheme with a defined benefit underpin or a
- defined benefit scheme with a money purchase underpin
What would you get from either?
Money purchase scheme with a defined benefit underpin
Your pension benefits at retirement would be the better of:
the money purchase element of the pension scheme or
the defined benefit underpin element of the pension scheme
Defined benefit scheme with a money purchase underpin
Your pension benefits at retirement would be the better of:
the defined benefit element of the pension scheme or
the money purchase underpin element of the pension scheme
In reality both are essentially, the same. However, when the schemes were set up, the expectation might have been that the first-named element (whether money purchase or defined benefit), would have normally been expected to produce the greater pension benefits for scheme members or their dependants.
You do not receive two pension benefits from a scheme with an underpin: just the better pension, from one of the two alternatives.
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 an underpin v3.1 Generic
Last updated 13/01/2007
Last reveiwed 08/06/2007
