Final Salary Pension Stories

[SomptingGuy]

I just got out of a management communication concerning our company's final salary scheme and how they (read we) are going to reduce its deficit. Simply put, our "final salary" is now going to be today's salary index linked, but with the annual increase capped. A few years of hyper-inflation above the cap and it'll all be worthless.

Anyone else got any similar stories about their final salary pension?

 

[ScottyUK]

Some of the UK schemes are similar: ours is through a third party and, assuming they remain solvent, the money invested by employees and employer is yours even if you leave. The specific scheme I'm a member of allows us to either leave the investment choice in the hands of an expert, or to make our own fund selections.

Most UK schemes have a two year period during which if the employee leaves they get their contributions returned, less tax, and the employer keeps their contributions.

I'm paying in 12% at present. It's heavy going with a big mortgage, but hopefully will pay off long term.

----------------------------------

I don't suffer from insanity. I enjoy it...

 

[duck0601]

Only a few companies provide a match for the 401(k). Most are vested immediately, as it is your cash, but if you take the money out of the plan prior to age 59-1/2, you not only get taxed on the amount, you get penalized by the IRS (Internal Revenue Service, the U.S. tax agency). You are allowed to "roll over" the amount into another plan, or into an individual retirement account (IRA), if you change jobs.

 

[moltenmetal]

The common plan here in Canada is a simple salary percentage-limited matching contribution, with no vesting period and 100% portability. If you contribute 3%, they contribute 3% (or more) to a preset maximum. The second the investment is made, it's your money to do with as you please, including transfer to another RRSP plan or even early withdrawl- of course, subject to a witholding tax. I don't know if this is a company choice or the law of the land, but I've never seen one personally that had a vesting period with a claw-back of company contributions for people who didn't stay longer than a certain period.

 

[corus]

In the UK there is a simlar system in most companies where your contribution is matched by the company. However, when the pension fund is doing well (as they did in the 80s) then the companies will take a 'pension holiday', as it is referred to. In simple terms they don't contribute at all to the fund. When the pension fund is doing badly, however, the companies merely ask you to work longer, take a lower pension, ask you to contribute more.

There's something wrong somewhere.

corus

 

[ozmosis]

the problem is, the holiday usually continues long after the fund is doing badley. It takes a long time to achieve a healthy pension fund but only a very short time for it to go pear-shaped.

 

[SomptingGuy]

I read (or heard?) somewhere recently that UK firms aren't allowed by (tax) law to overfund a pension, so the idea that a pension "holiday" is a cynical company bean-counter thing may not be true. Can anyone point to a legislative link?

 

[corus]

yes, SomptinGuy, the pension fund is limited by tax laws, however it is companies that refer to is as a 'pension holiday' and not some cynical comment. The point is that when the fund does well the company stops paying, when the fund is doing badly then it is you that pays in one way or another.

On this site

http://news.bbc.co.uk/1/hi/uk/4810030.stm

:

Q: Should companies have been allowed to take "pension holidays"? Has this been a factor in this crisis?
Jel, Cardiff


It certainly has. Horror stories have emerged of companies that took complete pension contribution holidays in the 1990s and into this century.

Often that was because their actuaries told them they had a notional surplus which they could afford to run down and the employers seized on this with glee to cut their costs and boost their profits and dividends.

In their defence they claim they were obeying Inland Revenue rules which put a limit on how big these surpluses could get before losing their tax exempt status.

But quite why some of them waited until they had plunged head-long into a deficit of hundreds of millions of pounds or even, in some cases, billions of pounds, I can't answer, other than to say it now looks like an astonishing level of negligence or stupidity somewhere along the line.

Now that deficits have arisen it has given some employers a good excuse to close their schemes to new members and bring in new versions which are much cheaper to run.



corus

 

[moltenmetal]

In the case of our plan, the company is NEVER permitted to take a "holiday", because there IS no company plan. There's no pension fund, no fund manager, and no company involvement in the program aside from merely making the electronic transfers every month and adjusting your payroll tax deductions accordingly. The money is contributed monthly by both the employee and the employer automatically, and once it's contributed, it's the employee's money, period. Of course, if you make bad investments, the market can take it all away in a heartbeat, but that's your problem.

The program is popular with small companies because it wastes little money on overhead. It's also popular with employees, especially those whose families have been screwed out of pensions earned by themselves or their parents at companies that are now insolvent.

 

[SomptingGuy]

I read about this:

http://www.pensionprotectionfund.org.uk/index.htm

In the IMechE's monthly rag recently. A kind of safety net.

 

[ScottyUK]

moltenmetal,

That sounds like a remarkably good scheme. Once again I am in envy of the Canadians.

----------------------------------

I don't suffer from insanity. I enjoy it...