Proposed changes would allow employers offering staff defined benefit (DB) pensions – schemes that give workers a guaranteed payment each year in retirement – to extract surplus funds from their pots.
But many schemes have built up funds over and above the size needed to pay their obligations to their employees, and proposed rules will make it easier for these excess funds to be used, either to help employees, or to re-invest in the business in other ways.
With DB pensions you don’t pay into your own pension pot and instead your employer is responsible for managing a series of investments in order to pay you a pre-agreed annual income in your later years.
The funds use money contributed by employees themselves and the employer to pay their obligations.
Why would the Government make the change?
Some experts say there is a positive side to the changes, as it allows for a more productive use of the cash.
“This money is not doing much, and could benefit both the members of the scheme and the company which has put in the lion’s share of the money.
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Sir Steve said that employees would also not be able to simply “dip” into the funds at will.
Despite the positives that could come from the move, other experts have also warned of potential risks.
It warns: “A scheme surplus can act as a financial cushion for members, to absorb unexpected costs or investment losses for the scheme. Without this cushion, the scheme may be more likely to struggle to meet its obligations to members, especially in times of financial stress or economic shocks.”
She explained that although DB schemes were currently in good health, their fortunes “could turn sour almost overnight.”
How much could it cost people and what happens if things do go wrong?
The expectation is that this won’t cost people anything.
This is an organisation that protects members of DB pension schemes if their employer becomes insolvent.
Full compensation is paid to those who have reached their scheme’s normal pension age, are receiving an ill-health pension, or are receiving a survivor’s pension, while 90 per cent compensation is generally paid to those below their normal pension age at the time the scheme encounters its problems.
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