Defined Benefit Pension Plan

What Is A Defined Benefit Pension Plan?

A defined benefit pension plan is one that offers a retirement income which is directly based on your final salary when you retire or leave the company, and your length of service. Normally much more generous than some other pension vehicles, and with a guaranteed return at the end of the fund period, they have been widely used by many companies to provide an attractive benefit to employees.

The use of defined benefit pension plans has declined in recent years, however, because of new accounting laws brought in by the government. These new laws affect the way that auditors look at the value of the pension, compared to how much it is costing the company to run. The value is taken at a set date, which has caused some concern for companies. This is because it is very difficult to value the fund at any one time, and if the stock market happens to be low on the day of valuation, it can appear that the company is spending far more on the scheme than it is worth. This in turn looks like bad value for shareholders and, under pressure from investors, can contribute to the company pulling out of the defined benefit scheme in favour of other schemes where the burden of risk is placed on the employee rather than the employer.

If your company operates a defined benefits scheme, it will probably be worth your while joining; particularly if you are planning on working for the company for some time. Here are some key facts:

• Both you and your employer will contribute to the scheme
• You will get a proportion of your final salary - usually 1/60th or 1/80th - for each year of service with the company
• You can receive a reduced pension and take a cash lump sum
• If you retire early or leave the company, your pension will be reduced
• There will be death-in-service and ill-health benefits included

If you have joined a defined benefit pension plan and your company is planning to change to a money purchase pension to avoid the accounting difficulties, then you should talk to your HR department or your manager to ensure that you are clear about the choices being offered to you. In some cases, existing employees can retain their defined benefits schemes, but some companies are even withdrawing this benefit for their existing staff and insisting that all employees move to a new scheme. If this happens at your company, make sure you find out the following:

• Check if the changes to your pension provision vary the terms and conditions of your employment. If they do, you may need to take independent pensions or legal advice to see if your employer is allowed to make the changes.
• Clarify if the pension changes apply to all employees, or just to new staff.
• Clarify if the employer is planning to reduce their contributions. If they are, then you may want to consider increasing your own contributions in order to ensure that your pension fund remains healthy.

If you are unsure about your current provision, or you want to discuss any aspect of pensions, then contact our panel of pension transfer advisors. Fully qualified, regulated by the FSA and independent, they can advise you on the best course of action and will be able to use their knowledge of the market to compare funds and benefits and recommend the products that are best for you.