When did Final Salary Pensions stop… Effectively, thinking of them as a collective, they are in the process of stopping however, that process is more one of metamorphosis! Over the past few decades, many have already defaulted and have been dealt with by the Pension Protection Fund (PPF).
Many schemes are currently underfunded, but it is very difficult to get enough reliable information to determine whether a particular one will fail and need rescuing by the PPF as they may already have a rescue plan underway and who on the outside really knows how well that is going?
To find out when a particular Final Salary Pension or Career-Averaged pension stopped you can look this up on the website of the sponsoring company or the relevant public organisation’s website.
Some private-sector Final Salary Pension Schemes closed to new entrants over 20 years ago. More recently, public sector schemes such as the Teacher’s Pension Scheme have also moved over to cheaper-to-run defined contribution schemes from CARE defined benefit schemes.
After closing to new entrants to reduce costs, the next step was to move active members i.e., those still working for the employer, from their defined benefit pension scheme (e.g., Final Salary Pension) to a defined contribution scheme (Workplace scheme with Personal Pension Pot) often outsourced to a Life company such as Standard Life or Aegon.
The scheme move did not affect the already built-up benefits the member had in the original scheme, but new pension contributions could no longer be made to the defined benefit scheme. Instead, contributions are allocated to a new workplace pension as a defined amount with the associated investment risk now being borne by the member.
This change meant that the number of years’ service and the pensionable salary amount both froze for the purposes of the scheme’s future liabilities. Not so good for the member because the scheme’s future liabilities are the members’ guaranteed income for life.
The third factor in calculating the annual pension benefit at retirement age is the scheme’s accrual rate which is typically one-sixtieth or one eightieth. The common goal used to be to aim to retire on two-thirds of your Final Salary, but life expectancy was lower then so paying it out for 10 to 15 years rather than 30 or perhaps 40 years was much more affordable.
Indeed, the move from a Final Salary based arrangement to a Career-averaged salary arrangement was a cost-cutting exercise used by some organisations to manage overall costs in order to keep the future pension benefit going for as many employees as possible.
But average salary based defined benefit schemes still proved to be too costly a type of pension to run and had to give way to cheaper workplace pensions which do not guarantee an annual income but instead are projected amounts usually based on expected stock market returns and other related pension assets.
Gradually, over time, defined benefit schemes will stop completely but they still need to meet the commitments they took on or, they are taken over by another body (PPF) that continues to do so. The Pension Protection Fund has been set up to step in as a last resort to take over when a scheme defaults.
Now with fully flexible pension arrangements, higher tax-free lump sums and longer life expectancy, the old measure of two-thirds of the last salary for life is rarely an available choice for new retirees. The main problem with a fixed annual income is that you can’t hold it back if you don’t need it. You can’t take more when you start your retirement and less later on when you are less active.
Personal Pensions are the new normal and seeking good advice from a regulated financial adviser about how to get the most from them and your state pension combined is the sensible thing to do. Other financial assets come into play if you have them and taking them in the most tax-efficient way helps you and your loved ones reap the maximum benefit of all that hard work building them up.
This article looked at an introduction to when did Final Salary Pensions stop 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.
Why wouldn’t you want to get some professional advice to gain increased financial peace of mind and family security? The next step is to have an informal exploratory chat with a qualified adviser to see if it is worthwhile proceeding to the formal process known as regulated advice.