Bargaining for Pensions Briefing No 99
Introduction
This briefing provides an outline of the main issues
surrounding occupational pensions. It is intended to provide a
background for branches which may have to bargain on general pension
issues.
Background
An occupational pension scheme is an arrangement
set up by employers to give their employees pensions when they
retire. Occupational pension schemes may also pay you a tax-free
lump sum when you retire and may provide benefits for your dependants
if you die before them.
Occupational pension schemes have two main forms
– final salary (defined benefit) or money purchase (defined contribution).
These are discussed in the following sections.
Payments you make towards your occupational pension
will usually entitle you to tax relief – up to a set limit. That
means at the basic rate of tax of 22%, every £100 that goes into
your scheme costs you £78. At the higher rate of 40%, £100 costs
you £60.
Final Salary Pension Schemes Money Purchase Pensions
Final Salary schemes (also known as defined benefit
schemes) provide a pension that is calculated using the member's
earnings close to retirement and their length of membership in
the scheme. They have an accrual rate, which is the rate at which
pension is secured, and this is usually a 1/60th or 1/80th dependent
upon the scheme.
This means that for every year of membership, the
member accrues the applicable fraction of their earnings at retirement
as a pension, which usually includes life cover and dependant's
pensions on death as well as the member's pension. The member's
contribution rate is fixed and the company picks up the rest of
the cost of providing the benefits. This can vary every few years
depending on liabilities paid out and investment returns received.
Money Purchase schemes (or defined contribution)
provide a fund at retirement with which the member buys an annuity,
or pension, to suit their circumstances. This fund is built up
from the member and employer contributions paid, plus the investment
returns.
The pension you receive in retirement is based on
the total payments into the pension fund and how well these investments
have performed – as well as the 'annuity rate' at the date of
retirement. This is the rate of exchange at which an insurance
company will convert your pot of money into an annual pension
allowance.
Both the member and the company contributions are
fixed, but the final fund value and the pension that it can secure
will not be known until retirement.
Pension Changes
If you are in a defined benefit scheme and your
employer is proposing to change your company pension:
-
Ask if the change applies to existing staff
as well as new staff
-
If it applies to existing staff, ask if employer
contributions are likely to be lower under the new scheme
than under the old
-
Determine if it represents a change to the
original terms and conditions of your employment
If it does, check with your Regional Officer to
determine if further action is appropriate
If your employer is seeking to change from a final
salary pension to a money purchase scheme this will not only substantially
reduce members' security but may also reduce the cost of the pension
for the employer. This is because most employers contribute significantly
less into a money purchase pension than a final salary pension.
Pension Protection
Under the provisions of the Pensions Bill currently
going through Westminster Parliament a Pension Protection Fund
will be set up to ensure people do not lose their pensions savings
if their company goes bankrupt. Currently, if you are a member
of an occupational pension scheme and your company goes bust,
you may find yourself facing significantly reduced payouts when
you come to retirement.
In future, should a company that runs a pension
scheme go under, the PPF will pay out 100% of the original pension
promise to members of the scheme who have reached pension age,
and 90% to people below that age.
The fund will be paid for through a levy on all
defined benefit company pension providers in the private sector.
This will be a flat rate fee to begin with, but will later be
charged in line with risk, so less solid companies will have to
pay more.
Conclusion
Overall, good occupational pension provision will
not only ensure that individuals do not live in poverty during
retirement, but will also provide a means for employers to assist
with staff retention. In addition, a strong occupational pension
is also a powerful recruitment tool.
Further Information
Further information on occupational pensions can
be found at:
UNISON Pension Information
http://www.unison.org.uk/pensions/index.asp
TUC Pay Up for Pensions
http://www.tuc.org.uk/theme/index.cfm?theme=oink
Action for Branches
This briefing is primarily for information and discussion
purposes. However if your employer is considering introducing
a new pension scheme or altering an existing one contact your
Regional Officer for further advice.
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