Final Salary Pensions

Not until 1978 did any employer have to preserve an employees pension rights. So anyone who left service prior to 1978 probably didn’t get any significant pension accrual until that date. Consequently if your grandfather changed jobs often and has told you pensions are a waste of time he may have a point but it may have more to do with his employment history than pensions per se.

Until recently Final Salary Pension Schemes were seen as the guaranteed way to get a good income in retirement. The sponsoring employer promises to pay you money in retirement. How it pays you the money is its responsibility. However they are expensive to run and at present could add 20% to 30% to the salary costs of a company. Where bottom line profit determines the very survival of many companies costs are cut whenever possible. Also with more job mobility fewer employers are prepared to shoulder the responsibility of their employees financial future and seek to share that cost more and more.

The scheme actuary is responsible to the scheme trustees to manage the pension fund and report if the amount of money that is paid in each year needs to go up, down or remain the same. In the 1980’s it was possible for well funded schemes to take funding “holidays” so that year the company might not pay anything to the scheme. This seems crazy with the benefit of hindsight.

Logically Final Salary schemes only work at a sensible cost if the number of active members paying in to the scheme out numbers the retired members, and positive investment returns prevail. You can think of any number of large local employers from 25 years ago who had apprenticeship schemes and significant income to the scheme. As the UK population ages, and 2/3rds of us are over age 45 now you can see that either the benefits have to go down or the costs have to go up.

When the costs go up the sponsoring company realises that it has an uncontrolled and ongoing liability to the pension scheme. This liability to the pension scheme now has to be reported on the company balance sheet, hardly a positive message to take to shareholders. Many final salary pension schemes have now been wound up or are in the process. Final Salary Schemes carry their own risks.

Public Sector Pensions

The final salary schemes offered by the government to its officers are paid for via taxation. They do not therefore face the economic realities of many private sector schemes. You may notice on your council tax bill a cost for the local police or something similar. As a member of the general public you are footing the bill for these schemes. As a member of these schemes you are well protected and provided for. A transfer out of such a scheme should be very carefully considered.