Salary pension schemes
number of high-profile companies are closing the doors on their
generous final salary or defined benefit pension schemes
longer life expectancy, low inflation, falling stock markets and
an increased regulatory burden for the move, saying it has
rendered this type of scheme too costly to administer.
In 1997 the
Minimum Funding Requirement was introduced forcing pension fund
managers to invest in gilts, which deliver lower returns
on average than equities. This has made it more likely
that companies will be left with a black hole in their pension
fund, which they have to fill.
Also, in the
current low inflation environment, investment returns have
fallen and are expected to stay low. According to consulting
actuary* Gassings, the average return from equities a year
making it easy for many final salary schemes to meet their
liabilities. Some schemes, including BT's were so flush with
cash that they felt able to take contribution holidays.
expected to produce only single-digit growth over the next few
years making it more difficult to fund final salary schemes.
benefits you have accrued to date in a final salary scheme are
safe - as long as the company is liquid. In most cases companies
are closing final salary schemes to new members, but existing
members will continue to receive the same final salary benefits
while they work at the company.
companies, however, could wind up the final salary scheme
altogether, meaning any more pension accrued after a certain
date will be on a less generous money purchase basis.
advice - how safe is your final salary scheme?