The principle of a final salary pension is that an employer promises to provide a fraction of an employee’s final salary (typically 1/60th or 1/80th) for each year of service. So for example if John worked for Acme for 30 years in a 1/60 scheme and retired when his salary was £20,000 per annum, he would receive a pension of 30/60 x £20,000 = £10,000. State pension would also be due to him.
In theory employees should love final salary pensions as they provide the promise of a specific income in retirement. However if the employer cannot afford to contribute or goes bust that promise could evaporate. Which is why the pension protection fund was established a government backed scheme to ensure 90% of benefits for most final salary pension scheme members. However this has placed an additional “tax” on final salary pensions and has meant that many are now closed or closing to new members.
Private sector employers face real difficulties with final salary pensions. They are banned from “overfunding” in good times so they cannot establish reserves; while in bad times they can be required to make huge contributions at the very time they have no spare cash!
For this reason most private sector employers are looking to close their final salary pensions. While in the public sector government is attempting to reduce the burden on the taxpayer by reducing pension entitlement; but his is understandably being resisted by unions and public sector employees.
If you are:
- an employer needing advice on a final salary pension
- an employee who is a current member or
- someone who has retained benefits in a final salary plan
Contact Us at Facts & Figures: the pensions experts for help and advice on all aspects of pension & retirement planning.
We are expert pension advisers (advisors) based in London.