Thanks.
Oh great, yet another scheme - PRS inspections !
- Thread starter SimonH2
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I struggle to see how either of those could be described as "restructuring the pension scheme so as to ensure its viability" (which is what I was asking stillp the meaning of)
Kind Regards, John
In a sense that's quite possible, since I am not totally clear as to what they are (until I do a bit of reading), but (since I don't know enough about them) wasn't actually talking about either - so couldn't really have been 'confusing' them! I was talking generically about 'final salary pension schemes', the common feature of which being (as it says on the tin1) that the pension they pay is related to one's 'final salary'.
Is not the problem that none of this can be done retrospectively? As I understand it, the problem with all these schemes relates to the fact that people retiring after a long period of service will receive a pension related to their 'final' salary, but for very many years in the past will have been paying puny contributions on the basis of what they were then earning? In the past, there have been periods of very rapid increases in income, and people retiring during one of those periods will probably have paid contributions for most of their pensionable life on the basis of dramatically lower salaries.
It is, and that, of course, is because the're is the only pension provider that is allowed to do that without having a 'pension fund'. Mind you, state pension is the antithesis of a 'final salary pension'! Indeed, even the 'Earnings-Related Pension Scheme' was exactly what it said on the tin, and essentially paid out on the basis of what had been paid in, regardless of a person's 'final salary'.
Kind Regards, John
Yes, but isn't it also the case that those people's contributions (as well as the investment income from those contributions) will have been used to fund the much lower pensions of those who preceded them?
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It can't do both - if incoming contributions are used in more-or-less real time to pay out those 'lower pensions' then they will not still 'be there' to earn any investment income in the future. As they say, you can't both have your cake and eat it!
The model you're suggesting would probably work to some extent, but I would think that there would probably still be a shortfall (particularly since there would be minimal investment income) since those paying contributions at any particular time will be younger/more junior than those whose pensions they are paying for, hence presumably with incomes much lower than the 'final salaries' of the pensioners being paid out. I assume that it would also be illegal, since in the absence of a 'fund', the ability to pay pensions at all in the future would be critically dependent upon enough people continue to work/contribute enough, and it's even possible that the company concerned will cease to exist. In essence, only the State can get away with that one!
As you will probably realise, I'm just making observations off the top of my head - it's not really a subject I know a lot about, or have ever given an awful lot of thought to.
Kind Regards, John
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only in an unfunded scheme (like a state scheme)
I don't believe there are any such schemes in the private sector.
And what's £125/year compounded over 10, 20, 30, 40 years ?
Or more importantly, what's the difference in growth between no-tax and with-tax-deducted ? In effect, it's reducing the return on investment from 2.5% to 2% which is not what I'd call insignificant. And of course, had you got a £100k pension fund, then part of that would have been from the compounding of returns - so someone today would not have £100k in the first place (all other things being equal).
And the ups and downs of the market would affect the whole value of the pot - so if your pot is a bit smaller, the gains from a rising stock market will be smaller too. I think you make the mistake (common advertising trick) of looking at only one small period to get a small figure - c.f. adverts with "only x pence/day" headlines.
Final Salary Scheme - what you get out is defined by some formula involving the time you've paid in and the salary you were earning when you retired. To a large extent, there's a disconnect between what you paid in and what you get out since it makes assumptions (as has been mentioned) about the salary profile over the years you are paying in.
Back when I had one, there were two levels of contributions you could pay in (% of pay), and IIRC you could pay in more if you wanted to.
Defined Contribution - what you get out is based on what you pay in and how long it's been in. Basically it's a savings scheme where you pay in, hope it grows faster than inflation, and at the end you get a pension based on what your pot is worth.
As an aside, final salary schemes have a perverse incentive to not carry on working part time after retirement age. Since pension is based on final salary (sometimes averaged over the last few years of service), if you were to (say) carry on working 2 days a week as an experienced specialist in whatever you did for the business, then you'd lose 60% of your pension because you'd only be earning 2 days salary. Hence why so many "retire" but are then rehired as a "consultant" doing exactly the same job for less hours.
Yes, I understand that, and that's what I've been talking about.
That is what I have been saying.
Yep, that's what I understand as a 'standard' (not 'final salary') pension. Even the State pension is essentially that, as are 'private' pensions.
What stillp was suggesting was that I was getting confused between were "Defined Benefit" and "Defined Contributions" schemes. Are you saying that what I understand as a "Final Salary Scheme" (as above) is what he calls a "Defined Benefits" scheme?
Indeed, but I don't think that (from the pension point of view) one has to be re-hired as a 'consultant' - I think that (again, pension-wise) one can be re-employed by the same employer the day after one has retired (either in a non-pensionable role, or starting a brand new pension scheme).
There are also other ways in which such pensions can be 'manipulated'. For example, at least some such schemes allow payments for various 'extras' to be regarded as part of one's salary (hence 'final salary'). If that is the case, then people can contrive to increase those extras during the last year or three of their employment, thereby appreciably increasing their pension (but with little increase in the total contributions paid over the period of their employment). I think that is largely true of the Public Service schemes.
KInd Regards, John
Yes. The key difference being that with defined benefit, what you get out is defined and the provider takes the risks in terms of how things grow (or not).
Indeed, but it will depend on how the employer systems work. I suspect that many can't cope with that sort of arrangement
On the subject of small deductions eating away at your fund, before Stakeholder pensions, L&P offices made a fortune from high and hidden charges.
Even today, if you are fool enough to have a Virgin Tracker, they will charge you 1% a year. If you have more sense, other schemes, such as L&G, charge 0.1%
So on our notional £100,000 fund, that's £900 down the drain every year to make Virgin richer. It dwarfs the tiny tax loss.
Even today, if you are fool enough to have a Virgin Tracker, they will charge you 1% a year. If you have more sense, other schemes, such as L&G, charge 0.1%
So on our notional £100,000 fund, that's £900 down the drain every year to make Virgin richer. It dwarfs the tiny tax loss.
These days, many of the employers I hear about not only cope, but prefer (or demand) 're-employment', given the hassle which might otherwise arise over the 'tax status' of a 'consultant' (many/most claiming to be self-employed). Of course, other employers prefer the reduction in responsibilities/liabilities which they enjoy if the person is not 'employed'.Indeed, but it will depend on how the employer systems work. I suspect that many can't cope with that sort of arrangement
Kind Regards, John
A Final Salary scheme is one common example of a Defined Benefit scheme. Before the restructuring my company's scheme paid out an amount that depended on length of service and a notional salary that was the average of the best 3 out of the last 11 years' service. Many employees therefore 'wound down' as they approached retirement, without losing too much of their pension as a result.
The arrangement I was suggesting can (and does) exist alongside a pension fund. Perhaps I should have written "isn't it also the case that those people's contributions (as well as the investment income from those contributions) will have been used to partially fund the much lower pensions of those who preceded them?"
Don't forget the existence of a fund, into which the employer pays as well, the amount being determined by actuaries and dependent on both the amount of existing employees' contributions and the liabilities, i.e. pensioners.
Yes, one company I know, having decided to close their DB scheme, let their HR department set up a 'stakeholder' pension - when Finance looked at the scheme chosen they found that the charges were 1.6% p.a.!
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