Private companies trying to buy out of final salary pensions

Recent research has revealed that approximately half of all private companies who currently have final salary pension schemes are planing to buy their staff out of the scheme.

The accountants firm KPMG have revealed that approximately a 90,000 private sector workers with the high value final salary pension schemes have been approached by their employer with an offer to buy them out and transfer them onto another type of pension.

Final salary pension schemes can be costly to run and many companies are seeking a way out of having to meet the demands of these schemes. The proportion of private sector workers on final salary pension schemes has already fallen from 34% in 1997 to approximately 10%.

Now only around 1.1 million private sector workers have a final salary pension scheme. The KPMG report has suggested that approximately a quarter of people who are offered an incentive to transfer out of their final salary pension are accepting it. The report also suggests this number is expected to rise over the next few years as more companies start to take up this practice.

A variety of incentives are being offered to people to buy them out of their existing pension. Often a cash incentive is offered upfront to persuade people to transfer out of their scheme. Another inventive which is used is an 'enhanced transfer value': if the transfer value of an individual's pension is currently £75,000, employers may offer to increase this to £100,000 if they transfer out of the final salary scheme.

However, should the individual accept the buy out offer, they are often left much worse off under the new scheme. The average value of a final salary scheme is approximately £7,500 per year, where the average value of the pension that many people are being persuaded to transfer into is £1,300 per year.

The companies are trying to persuade people to switch into 'defined contribution' pension schemes. These schemes are tied to the stock market and as such the retirement income is not guaranteed. They are more risky, they do not secure a pension against the risk of inflation and often do not provide a widows' or widowers' pension.

The Pensions Minister, Steve Webb, had raised concerns over this practice earlier this year, suggesting that it could lead to a new scandal. He indicated that there is the potential for these transfer offers to be mis-sold to customers and wants the Pensions Regulator to identify any bad examples of this practice and take the appropriate action to prevent it from occurring.

The Pensions Regulator have already advised fund trustees to assume that these offers are not in the best interests of their members.

Danny Cox from the independent financial service advisor, Hargreaves Lansdown, believes that many customers do not realise the benefit of their existing pension scheme and are being encouraged to only think about the short term benefit of the offers they receive.

 

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Retirement Solutions (UK) Ltd are independent financial advisers that specialise in financial products for the over 50s. Visit the web site at www.retirementsolutions.co.uk

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