Private sector Final Salary Pensions still exist, but most are not in their original form. Recent statistics from the Pension Protection Fund (PPF) and the Pensions Regulator report that just over 1000 of the United Kingdom’s original six and a half thousand Final Salary Pension Schemes remain fully open to employees.
The term ‘fully open’ means the scheme continues to accept new members and benefits continue to accrue. Many schemes are closed to new members meaning the scheme does not admit new members. However, existing members can continue to accrue pensionable services and benefits.
Even in a scheme where you cannot build up any new benefits aka 'closed to new benefit accrual’, there are trustees overseeing the fund, which is a ring-fenced pool of assets set aside to pay the future liabilities (members pensions) of the scheme and ongoing responsibility of the sponsoring employer to keep the fund topped up in the event of a shortfall.
Because many larger employers have adopted the strategy of migrating their pension provision towards Defined Contribution (DC) by opening a DC section in an existing Defined Benefits (DB) scheme, many hybrid schemes may accept new members but no longer allow new or existing members to accrue defined benefits.
According to Steve Webb former Pensions minister, more than four million people under pension age have rights from past service in a salary-related pension scheme (defined benefit pension schemes).
Final Salary Pension Scheme’s pensions are calculated by multiplying your length of service measured in years by the annual value of the last salary you received (hence - final salary). Note: This could be an average of the number of your last years. Then multiplying by a fraction known as the Accrual Rate commonly set at 1/60th or 1/80th
A final salary pension lump sum might be paid in addition to your pension entitlement but more commonly, you have to give up some future pension income to take a specific lump sum which is known as pension lump sum commutation. Each scheme sets its own commutation factor so there are no hard and fast rules for calculating this.
The other type of defined benefit scheme is the career average scheme where your pension is based on the average of your pensionable earnings throughout your membership in the scheme. All defined benefit pension schemes are revalued in line with inflation.
The value of pension earned in each year is calculated using the scheme’s accrual rate – such as 1/60th or 1/80th of your pensionable pay. Your final pension is calculated by adding together all the revalued pension earned in each year of membership.
For example, some schemes don’t normally count extra earnings, such as overtime, commission, and bonuses. In addition, the value of benefits in kind is other benefits that are not paid as cash to the member, for example, a company car or car allowance.
The scheme might also only count a proportion of your wages or salary. The amount of earnings used to calculate retirement benefits is often referred to as pensionable earnings and can be found on your benefits statement.
Also common with many DB schemes, the purpose of a state pension deduction was to consider the basic state pension is built up throughout your membership of your Final Salary Pension Scheme. This means that you were ‘contracted out’ of National Insurance contributions and therefore, need to be aware you may not get the full state pension at your state pension age.
This article looked at an introduction to what happens to do Final Salary Pensions still exist but there is a great deal more to consider than is covered here. The advice can only be given to an individual after a thorough assessment of all personal (and their partner’s) financial circumstances.
Would you like to get some professional advice to gain increased financial peace of mind and family security? If the answer is yes, the next step is to have an informal exploratory chat with a qualified financial adviser to see if it is worthwhile proceeding to the formal process known as regulated financial advice.