OCCUPATIONAL pensions have been going through tremendous change in recent years and this year it looks likely that this will continue. The Pensions Board, as the regulator, is soon expected to issue changes to the Minimum Funding Standard. This Standard applies to certain types of occupational pensions and it is designed to ensure that these schemes are being run on the basis that there will be sufficient amounts of money in them to meet their liabilities under the Pensions Act.
The Pensions Board will also reissue a date by which scheme trustees (as those responsible for looking after the scheme) must submit funding proposals to them ensuring that their scheme is going to be able to meet this standard. As many schemes struggle to do so, further significant changes in pensions may still be seen.
In the latest figures on pension coverage for workers aged between 20 and 69 produced by the Central Statistics Office in 2008, just over half of these workers (54%) had a pension (not including entitlement to any State pension). However, 46% of these workers either didn’t have or didn’t know if they had a pension.
What then are the main types of occupational pension schemes?
There are many different types of pension schemes but they can be broadly described under three different headings; Defined Benefit schemes, Defined Contribution schemes and Hybrid schemes.
What are the main features of each type of pension scheme?
Defined Benefit schemes:
- The employee’s pension and/or lump sum at retirement is linked to their salary at or near their retirement age or the date they leave their employers service.
- The employee’s contribution to the scheme (if any) is based on a percentage of their salary, with their employer contributing the balance of the cost necessary to fund the scheme. However, in some of these schemes both the employer and employee’s contributions are fixed as a percentage of salary. Defined Benefit pension schemes, in the main, are subject to the minimum funding standard and many have seen significant changes recently.
Defined Contribution schemes:
- The employee and the employer pay a percentage of the employee’s salary into the pension scheme. These contributions are then invested and whatever the value of the individual employees fund is at their retirement is used to purchase them a pension and/or provide them with a lump sum.
- This year the Finance Act introduced new additional retirement options for members of DC Schemes. Subject to an employee meeting certain conditions they will now be able to transfer their fund at retirement to an Approved Retirement Fund from which they can draw down an income.
Broadly, these schemes combine a mix of a defined benefit scheme and a defined contribution scheme. There a number of different types of Hybrid Schemes.
The following are just two examples of the different types:
- Here a Defined Benefit scheme applies on a portion of an employee’s earnings up to a certain limit and a Defined Contribution scheme applies to earnings above this limit.
The employee then draws their pension and/or lump sum from both these schemes at retirement.
Career Average Re-valued Earnings:
- This is a type of Defined Benefit scheme but it is not linked to the employees earnings at or near retirement or the date of leaving service. Instead the benefit that is provided is linked to an average of the employee’s salary each year throughout their career. The benefit that is built up each year under this type of scheme then re-values (in line with a chosen index) up until the date of retirement or leaving service.
Written by Rachael Ryan is an official in the SIPTU Legal Rights Unit.
This article was published in the March 2011 issue of Liberty.