What is a Final Salary Pension Plan?

There are many kinds of pension schemes offered by employers, one of which is a final salary pension scheme. This is a type of defined benefit pension plan. It’s normally written for individuals who are preserved members of a final salary pension scheme.

Definition

Such plans are mostly meant to provide benefits based on four key factors. These are the employee’s pensionable salary, the length of pensionable service they were credited with as being an active member of the scheme and the rate of accrual which uses the salary and service to calculate the pension. The circumstances under which the benefits were taken from the scheme are also taken into account. Such include ill health, death and early retirement.

In a final salary scheme, the pension is based on one’s final pensionable salary. For preserved members, this is normally worked out over the years immediately preceding one’s cessation of being an active member of the scheme. Different schemes have varying definitions. The definition of one’s final pensionable income is what matters in this type of plan.

Benefits

A final income scheme links one’s pension benefits to their pensionable earnings at the time one ceases being an active member. It also safeguards the members against mortality and investment risks. This is because the sponsoring employer shoulders such risks. The employer also foots the largest cost of the benefits. Such plans also fall within the scope of regulatory authorities, hence the scheme is closely monitored.

Disadvantages

Final income schemes don’t provide guaranteed pension. The benefit paid depends on several factors, with the most significant being the plan’s ability to pay benefits to members when they’re due. If the employer goes out of business, the benefits will most likely be reduced for some members. Excessive regulation also increases costs and places sponsoring employers at a greater risk.

Discover more…

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *