Are there salary-related schemes that are not based on final salary?

Yes. The commonest alternative is a 'career average' salary scheme. These are not as good for people who get promoted late in their career, but can be better for people whose earnings do not go up very much, or vary (because of changes in their hours) or decline (as may happen to manual workers).

Replacing a final salary scheme with a career average scheme is one of the ways that employers with pension fund deficits are trying to reduce the cost of pensions. There will certainly be many losers from such a change. Whether there are any winners will depend on the detail, in particular how much the employer is cutting in contributions to the scheme.

Career average schemes can work in different ways. In the simplest kind, your pension will be based on a proportion of your pay each year and each year’s accrual will then be revalued in some way (e.g. by price inflation). In other schemes, your pay for previous years will be uprated by some inflation measure so that it is expressed in today's money before the average is taken. Once this is done, the pension is worked out in the same way as a final salary scheme, except the salary used is your career average.

Note: This content is provided as general background information and should not be taken as legal advice or financial advice for your particular situation. Make sure to get individual advice on your case from your union, a source on our free help page or an independent financial advisor before taking any action.

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