Follow Incipt on Twitter

Company pension schemes are not all the same in fact they differ wildly. However the schemes can be very broadly divided into two types:

Defined Benefit Schemes
Defined Contribution Schemes (DC Schemes sometimes also called Money Purchase schemes)

Are these investments safe?

There has been much interest in the media recently about company pension schemes closing and many members being left with a fraction of the pension they thought they were due to receive. This is a problem associated with defined benefit schemes.

What’s the problem?

Defined benefit schemes are generally funded assuming that they will be on-going. What this means is that at any one time they are unlikely to have exactly the right amount of money to secure all the members benefits with an insurance company. This might sound slightly ludicrous but it is important to remember that if schemes were not funded this way the investment strategy of the schemes would need to be different (in particular they would need to invest in bonds to match the cost of buying annuities from an insurance company and so could not invest in equities) and this would mean the schemes would more significantly more costly to run.

However, prior to 11 June 2003, if a company decided to stop paying contributions into the pension scheme and stop the accrual of benefits for scheme members (called Winding-up) then the amount of money the law required them to pay into the fund was not enough to secure all the members benefits with an insurance company. In these instances the pension scheme members would get whatever benefits could be secured for the money that was available. This has meant that some pension scheme members have got less pension than they were expecting.

What the has Government done?

The government changed the law from 11 June 2003 so that if an employer wants to windup its pension scheme (while the employer is still solvent) then they must pay an amount into the scheme such that the total assets are sufficient to secure all the members benefits with an insurance company. This means that solvent employers can no longer walk away from the pension schemes leaving members with a fraction of their original benefit promise.

However there is no protection in place yet should the employer go insolvent. The government has proposed a scheme called the Pension Protection Fund (PPF) due to be introduced in April 2005 but has not given details of exactly how this will work.

144 Responses to “Company Pensions”