The final salary minefield

by Dr Ros Altmann Pensions expert and Government advisor

A deferred benefit or final salary scheme is only as good as the employer who provides it.

The forthcoming Pensions Green Paper must address the problem of pension scheme 'wind-ups'.

At the moment, there is no protection for members who have not yet retired from their company final salary scheme.

If the employer becomes insolvent, they could end up with no pension at all, (as well as losing their job) and, even an employer making huge profits can decide the wind up their scheme at short notice, leaving members who have not yet retired with only about 40% of their promised pension benefits.

All this is completely legal.

Big profits

The current situation makes a mockery of our pensions laws and regulations. We have the most amazingly complex legislation, because of successive changes added to existing rules, rather than replacing the old ones each time.

This is guided by the principle of 'no retrospection' - existing pension rights must not be damaged, even marginally. Member Nominated Trustees look after pensions, OPRA fines employers if every penny of contributions isn't paid on time.

But what is the point of all this, when members who have paid in loyally for over 30 years can actually lose their whole pension. Even a company making big profits, complying fully with the law, can wind-up the scheme, leaving many members with only 40% of promised pensions.

Effectively, the law protects the pennies, while the pounds disappear out of the door. In focussing on tiny details, the regulations have lost sight of the big picture.

No protection

None of the many official Government Reviews have provided proposals to give proper protection to pension contributions.

But Government must accept some responsibility, since pension rules did not allow people contributing to an employer's scheme to diversify their investments and contribute to any other pension.

Without protection, this is like financial advisers recommending clients to invest only in one share - and also betting their job on this too.

If the company fails, they lose their pension and their earnings.