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Final salary scheme (quick Q)

Including Financial Independence and Retiring Early (FIRE)
MrFoolish
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Final salary scheme (quick Q)

#351136

Postby MrFoolish » October 27th, 2020, 7:06 pm

Just a quick question about the mechanics of a company final salary scheme, out of curiosity. When someone in a scheme retires, does the scheme manager start paying them from the assets in the fund, or is an annuity bought on their behalf?

Thanks.

Alaric
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Re: Final salary scheme (quick Q)

#351139

Postby Alaric » October 27th, 2020, 7:16 pm

MrFoolish wrote: When someone in a scheme retires, does the scheme manager start paying them from the assets in the fund, or is an annuity bought on their behalf?


Both practices may be followed along with more exotic variations such as where the scheme reinsures the longevity risk but retains the investment risk. Unless they take steps to the contrary such as winding up the scheme the actual payment would usually legally come from the scheme even if in practice they off load the risk by buying an annuity in the name of the scheme Trustees..

Avantegarde
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Re: Final salary scheme (quick Q)

#351144

Postby Avantegarde » October 27th, 2020, 7:34 pm

The usual practice is to pay the pensions out of the income generated by the investments.

dealtn
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Re: Final salary scheme (quick Q)

#351314

Postby dealtn » October 28th, 2020, 12:18 pm

Avantegarde wrote:The usual practice is to pay the pensions out of the income generated by the investments.


The usual practice is to pay the pensions out of the investment fund, some of which will be income generated by the investments. Some will be from (net) realised capital gains, and some will be paid from other sources such as contributions from both employer and employee into that investment fund depending on how the scheme is open/closed for new contributions etc. The investment fund may also have contracted out some of this "obligation" by way of a hedge instrument, or a direct contract with another provider (but it wouldn't be usual for this to be an individually tailored annuity at the micro level).

A more specific answer will be available if you named the scheme, and often the sponsor company will have a section on their website, or more commonly a specific website only accessible to members of the scheme (be they current, deferred or pension members). Such websites will commonly have a FAQ sections well as a "contact us" means to answer your specific questions.

Should the particular fund be operating under Pension Protection Fund, the answer is different, but that doesn't appear to be the case here (else you would have mentioned it).

Dod101
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Re: Final salary scheme (quick Q)

#351327

Postby Dod101 » October 28th, 2020, 12:57 pm

MrFoolish wrote:Just a quick question about the mechanics of a company final salary scheme, out of curiosity. When someone in a scheme retires, does the scheme manager start paying them from the assets in the fund, or is an annuity bought on their behalf?

Thanks.


Nearly all final salary schemes are closed, nowadays, to new entrants and for contributions from existing members (who will nearly all have been transferred to a money purchase scheme). The result is a sort of 'zombie' scheme where the assets are slowly running down as the liabilities diminish. In that situation, the pension fund trustees might well sell the liabilities to an insurer/fund manager like say, Legal & General, together with a large chunk of money to cover the liabilities (or so the insurer hopes!)

Except possibly for very small schemes I am sure pension fund trustees would never by an individual annuity when a member retires.

Dod

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Re: Final salary scheme (quick Q)

#351337

Postby scrumpyjack » October 28th, 2020, 1:30 pm

If the fund were to buy an annuity, it would have to have the terms of the DB pension, eg RPI linked, x% to wife on death etc etc.
May be difficult for the fund to find an insurer prepared to sell an annuity on those precise terms.

jonesa1
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Re: Final salary scheme (quick Q)

#351460

Postby jonesa1 » October 28th, 2020, 7:03 pm

There are also public sector DB schemes (final salary or career average salary), many of which aren't backed by any sort of fund and instead represent a liability for current and future tax payers, many of whom will have far less beneficial pension arrangements themselves (and in many cases lower salaries, despite the myth that the public sector is less well remunerated than the private sector.


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