Private sector employees who are still members of final salary or other “defined benefit” pension schemes might count themselves lucky to be in such attractive retirement arrangements – but they could well find that the terms they receive are downgraded in a year’s time.

In April 2016, the state pension scheme will be overhauled – and a side-effect of that will be the ending of a very useful rebates system for all defined-benefit plans. As of that month, employers will stop receiving a 3.4% national insurance rebate set up as an incentive to “contract out” of the secondary state pension.

This means that the costs of running these schemes will go up. “A number of employers will probably seek to pass on the cost – as it would otherwise be a cost to them,” says Tim Smith, a pension specialist at the law firm Eversheds.

So who will the extra cost be passed on to? Employees. The main options facing private sector companies, according to the actuary Mercer, are to require their workers to pay more in the form of pension contributions or to reduce the pension benefits offered.

“For an employer with 1,000 staff, we’re talking about a substantial amount of money,” says Malcolm McLean, former chief executive of the Pensions Advisory Service.

“I’d certainly expect many employers to look at the possibility of doing something about it – not necessarily closing down the scheme but changing the accrual rate or pushing back the individual’s retirement age, or increasing the level of contributions an employee has to pay.”

Public sector workers are, however, far less likely to be affected. In 2011 the Government announced that public sector schemes would be protected for 25 years from negative changes.

However, members of both private and public sector defined-benefit schemes could see their take-home pay fall slightly in April next year.

Source: Belfast Telegraph