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What about hybrid pension schemes that combine salary-related and 'money purchase' schemes?
Elements of the two basic pension types – salary-related and 'money purchase' – are sometimes combined. Many people in salary-related schemes do this for themselves by saving in a stakeholder or AVC scheme as well. This will give them a money purchase pension on top of their salary-related scheme. Some employers have hybrid schemes that combine elements from the two approaches. There are different ways to do this:
- The scheme is basically a money purchase scheme but with a guarantee that it won't fall below the level that would be provided by a (poor) final salary scheme. In other words, you have some protection against the pension scheme investments performing badly.
- The scheme is basically a final salary scheme but with the chance to do better if the scheme's investments perform so well that the contributions you and your employer have made on your behalf can provide a higher pension.
- The scheme is a money purchase scheme but with the employer's contributions varied with the aim of achieving a particular target pension. These are common among small groups of powerful people, particularly senior managers and directors.
- A scheme that works like a money purchase scheme for younger staff, but becomes related to salary in some way as staff get older.
- Members build up salary-related benefits on pay up to a certain threshold, but money purchase benefits on salaries above that level.
Hybrid schemes can combine the best or worst of both worlds. If you are a member of such a scheme then you should make the effort to understand how it works. Some employers have replaced salary-related schemes with hybrid schemes as a way of reducing pension fund deficits. This is a way of sharing investment risk between employer and employee, which can reduce the amount that the employer has to keep in the scheme to meet the funding rules.
Very few new employers have been prepared to set up salary-related pensions in recent years, but the government have suggested that hybrid schemes may suit new employers who want to have a decent pension that offers more than a minimal money purchase scheme. In the same way, employers planning to close their salary-related pensions have sometimes been persuaded to introduce a hybrid scheme rather than a money purchase scheme. The main problem is that they are inevitably somewhat complex to understand.
Ideas for new types of workplace pension have been discussed, under the heading of 'defined ambition', but have not been taken forward by the government.