Death-in-service payouts at risk as firms cash in final salary schemes

Death-in-service payouts at risk as firms cash in final salary schemes

A man dies in a car accident, leaving behind his girlfriend and baby son. Although he did not have savings, he was a member of a company pension plan that would pay out a fairly handsome sum under such circumstances.

But the man had filled out an 'expression of wishes' form saying who the money should go to before he met his girlfriend, so there is no mention of her or their baby on the form and they will get nothing.

While this is a fictional example, the transfer of final-salary schemes to specialist management companies could result in many cases such as this. More than 12 million people are estimated to be in final-salary schemes, where boards of trustees decide to whom benefits should be paid in such situations. But changes in ownership of these schemes is cutting out the trustees' role and taking away scope for discretionary decisions.

Until now most employers have retained full control of their pension funds, but in more and more cases the funds are being passed to insurance companies that assume responsibility for paying the pensions. Insurance firm Paternoster last year took on the liabilities of P&O, Emap and 27 other employers, with a total of 20,000 future pensioners and assets worth £1.5bn. Paternoster chief executive Mark Wood thinks this market could easily grow fivefold this year. 'There's a huge amount of business being done,' he says. Mercer, a firm of actuaries which helps to arrange such transfers, reckons that in five.....continued below

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years' time about £100bn of pensions assets, representing up to 20 per cent of final-salary schemes, could have been transferred.

Theoretically, an insurer is less likely to collapse than an ordinary company, but trade unions are not so confident. 'The long-term effect on members' benefits is unknown,' says Naomi Cooke, head of pensions at the GMB union.

Wood says that when schemes are transferred over, the old trustees can decide to pay extra so that 'discretionary benefits' will continue to be given. So, he says, there would be no problem in paying out money to the bereaved girlfriend in our example.

'The more obscure the situation becomes, the less expensive it is for us,' says Wood, explaining why Paternoster can finance one-off decisions to look after orphans more easily than problems such as requests for early ill-health pensions.

But Mercer and pensions specialists at the TUC doubt that insurance companies will often grant discretionary benefits. Robin Ellison, a former chairman of the National Association of Pension Funds, says: 'In the next three or four years, the human side of pensions is going to be a big issue. Schemes run by insurance companies will be very remote operations.'

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