Most final salary pension schemes in the private sector have now either been wound up or closed down, at least to new members. It is widely anticipated that many of the remaining ‘open’ schemes will shortly follow suit.

But what’s the difference between a scheme being wound up and one which is being closed? And what implications are there for members of those schemes?

Wound-up scheme
Simply, the scheme ceases to exist and all existing members are obliged to transfer their benefits to an alternative pension provider: usually a personal pension or a pension buy-out bond provided by an insurance company. Typically the scheme will arrange for most or all of the members to be transferred to an alternative scheme of their choice except, perhaps, for those members who opt for an alternative.

There is no guarantee that members of these schemes will receive all of the benefits they had previously been promised if the scheme does not have enough assets and the employer has gone into liquidation. Even the Pension Protection Fund doesn’t guarantee full benefits….not by any means!  

Closed schemes
These schemes don’t wind up, at least not immediately. Instead, either the scheme is closed to new members (i.e. employees) - with existing members continuing to accumulate more benefits – or it closes to all further benefits, including existing members. 

In these circumstances the scheme may not have enough assets to meet the cost of all the promised benefits and transfer values may accordingly be reduced for members wishing to leave the scheme. There will usually be no immediate financial danger to the benefits of scheme members if the employer is financially solvent.

Many people in these schemes approach The Pensions Office seeking to transfer their benefits to a personal pension. However, where the employer is of good financial standing we often advise against such a course of action as the employer is obliged to make additional contributions to increase the scheme’s assets. As this happens transfer values should increase….so it may be worth waiting before a transfer out of the scheme may be advantageous.

Not sure whether you are affected, or whether you should consider a transfer of your pension benefits?