Oh great, yet another scheme - PRS inspections !
- Thread starter SimonH2
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Rightly or wrongly, I regard that as a type of 'final salary scheme'. As you illustrate, different schemes have different definitions of 'final' salary, and schemes may change that definition.
For example, the NHS scheme (which I imagine is similar to other Public Sector schemes) originally used the best of the last 3 years of employment, but then changed it to the best three consecutive years out of the last 10 years. The pension was then 1/80th of that figure for each year of service. More recently, they have moved somewhat away from 'final salary' to a system which more reflects the fact that incomes (and contributions), after indexing to current 'money value' are lower in the earlier years of service. However, at each of these changes, scheme members have been offered the option of remaining with their existing scheme.
Kind Regards, John
Yes, but my point was that a fund can only exist if contributions go into it, rather than funding current pensions.
I obviously misunderstood your earlier comment. I thought you were suggesting that most/all of contributions (both employer's and employee's) could be used to pay current pensions - in which case there would be little or no fund, obviously not allowed unless one is 'the State'.
Even if contributions are only 'partially' used to pay current pensions, that would obviously reduce the growth of the fund, and therefore set the scene for probable problems in the future.
Kind Regards, John
Possible, rather than probable; that's why we have actuaries.
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Actuaries obviously have to make assumptions/predictions (particularly in relation to investment returns and life expectancy), on the basis of which they can calculate estimated required contributions, but they have to work within the framework of the rules which exist to safeguard the pensions of existing scheme members.
An acceptable pensions scheme has to be constituted so as perform satisfactorily for existing members regardless of the future of the employer, and to essentially be 'independent' of that employer. In other words, the fund (including expectations of its future growth) has to be adequate to ensure that the pensions of existing members can be paid satisfactorily even if, say, the employer ceases to trade (or markedly 'downsizes') tomorrow, such that no (or much lower) further contributions are paid into the scheme.
If the ability to pay pensions to existing members were at least partially dependent on utilising predicted 'current' contributions (contributions being paid at the time the pension was being paid out), the scheme would not be able to fulfil its pension-paying commitments in full if, due to changes related to the employer, those contributions cease or fall substantially. For that reason, I rather doubt that it is allowable to have a scheme which is reliant on 'current' contributions to at least partially honour pension commitments to existing members.
Kind Regards, John
Of course it is, if the income is sufficient.
I'm not sure what you're struggling with - there's a sum of money - the fund - which has incomings - contributions by members and employers, investment growth - and outgoings - pension payments, fund managers' fees. The incomings over time have to be sufficient to fund the outgoings over time.
Did you read and understand what I just wrote?
Everything you say above would be fine so long as assumptions and predictions about future happenings with the employer proved to be correct. However, as I said, what if the company ceases trading tomorrow, so that future contributions by members and employer will be zero from now on?
As I understand it, a pension fund has to be adequate (within the limitations of estimates of investment growth and members' lifespan) to fund the pensions of existing members for however many years/decades they are entitled it. If the ability to achieve this is reliant upon assumptions regarding ongoing contributions, then it could obviously not be achieved if, as in the scenario I mentioned, those contributions will be zero from tomorrow onwards.
In other words, a properly (and legally) constituted pension scheme should be able to survive, without detriment to the members, even if the employer does not.
Kind Regards, John
I can't see that a scheme worked as stillp describes would meet solvency requirements.
Do you know of any scheme operating like this?
A lot of companies have been paying L&P providers to take away their scheme obligations.
Do you know of any scheme operating like this?
A lot of companies have been paying L&P providers to take away their scheme obligations.
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Exactly - since such a scheme would not really be worth the paper it was written on. One might just as well 'trust' an employer (if they still exist) to pay pensions out of current assets and income (including ongoing 'pension contribution income') for as long as was necessary (which, as far as I am aware, is not allowed for anyone but 'the State').
The whole idea of legally constituted and managed pension schemes/funds is surely that they are independent from the employer concerned, and that the scheme is not only has to be 'independent' of the company, but the fund has to be 'ring-fenced'.
Of course, dodgy (and probably illegal) things do go on, and schemes can be mis-managed, even if only due to incompetence, rather than dodgy intent. I believe one of the dodgy things (quite probably not legal, at least now) is for a pension fund to 'invest in' the company concerned. In other words, the company just uses the pension fund as a 'nest egg' (rather than leaving it 'ring-fenced' and competently invested), so that if the company goes bust, the fund loses its money.
Kind REgards, John
Yes. I wish you had done the same for me.
Can you tell me where I wrote that the fund is insufficient for the scheme's obligations to be honoured?
All of them!
You wrote ...
If the company goes bust, such that the income falls to zero for evermore (hence no more payments into fund), if the fund's honouring of obligations (to scheme members) was previously reliant on at least some ongoing 'income' (going into the fund), once that ongoing income falls to zero, it could not then be able to fully honour its obligations. Put another way, in terms of your statement, if a 'sufficient' income is required by the scheme, then it can't be 'sufficient' if it becomes zero!
This is surely why a pension scheme and its fund are constituted be totally separate from the employer and its employees, and why the scheme/fund has to be able to honour its obligations regardless of the future fate of the employer. You seem to be considering the pension scheme and employer as being far more 'associated' than they are, or should be.
I know people who are continuing to draw their company pensions, at 'expected levels', many years after that company ceased to exist. I don't think that would be possible if things worked the way you are suggesting.
Kind Regards, John
But to be solvent, it must have sufficient capital resources to meet the obligations (current and future outgoings) without additional contributions.
After all, you've already been paying in your 6% for 40 years, and your employer whatever they thought they could get away with. When you retire tomorrow, you have an entitlement to receive your 50% of final salary until you snuff it.
When the scheme closes, it stops taking on new obligations (no further pension rights accrue) and employees stop paying salary deductions into it (though the employer may have to top it up if they have allowed it to become insolvent*). But it is still supposed to pay out the pensions that people have already earned.
The scheme has to issue an annual solvency report.
*this can be a source of enormous problems.
In that case there will be no new entrants to the scheme.
I'm sure that's one of the reasons.
I'm not sure why you should think that.
Of course, However, there could be thousands receiving, or due to receive, pensions from the scheme. If, per your suggestion, they would only get their full expected pension if there was ongoing 'sufficient income' from members contributing to the scheme, then those drawing, or due to draw, pensions would obviously be hard done by if contributions (from anyone, not only 'new entrants to the scheme) suddenly ceased.
Maybe I've misunderstood, but you have made statements that suggest that an employer has more involvement in the management of a pension scheme than is (or should be!) the case).
Kind Regards, John
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