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Defined Benefit (Final Salary) Pension Schemes - Friend or Foe?
If you are at all involved with a Defined Benefit Pension Scheme as a trustee, sponsoring employer or in-house administrator, it would be perfectly understandable if, in the current climate, you regarded your scheme as your worst enemy.
Over recent years you will have seen a combination of one or more of the following factors adversely affecting your pension scheme:-
- lower investment returns
- worsening annuity rates
- minimum funding requirements
- aging population
- members living longer
- increasing government interference (FRS17)
- increasing administration costs
- growing funding deficit
In addition the Government has recently announced the introduction from 2005 of a Protection Fund for employees of companies, which can no longer fulfil their obligations to employees in respect of their defined benefit pension plans and everyone will be required to pay a levy to the fund – another cost!
Legislation is about to change yet again from 2005 – they call it Pensions Simplification!
So whichever way you look at it, pensions are becoming much more expensive to fund and many employers are reviewing the way in which they do so.
However, despite the seeming “gloom and doom” outlined above, the well-run defined benefit pension scheme can be a real asset in attracting and retaining quality staff as it is the only type of pension scheme able to provide meaningful assurances with regard to positive retirement planning.
It is essential, therefore that you make the most of the real asset that you have and get quality on-going advice and administration/record-keeping at a competitive price. It is easy to think that closing the scheme to new members is the best way to save money but this is not necessarily the case – without an inflow of “young-blood” you are locking in the ageing process, thereby losing the benefits of maintaining a young average age profile and hence increasing the costs for existing members possibly to a level that you are unable or unwilling to sustain.
Ron Dart, Director of N W Brown Group, who has 35 years experience in dealing with defined benefit pension schemes says “ With the Government having plugged the loophole enabling employers to wind-up their defined benefit schemes without having to fill any funding gap, it is even more important that advice and administration costs are looked at closely to ensure that the best value for the scheme is being obtained and to maintain your scheme as a “friend” rather than “foe”. We would welcome the opportunity to review these areas on behalf of the Trustees/Employer and feel confident that cost savings can be made.”
Ron can be contacted on 01223-357131 or Ron.Dart@nwbrown.co.uk.
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