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My employer wants to shut down our pension scheme and replace it with another one. What are our rights?
While this usually means an employer is looking to make savings by replacing a generous scheme with one that is less so, this is not always the case. It can also be a sensible way of making big changes to pension arrangements when it is too difficult or complex to change the existing pension scheme.
It may be done to comply with auto-enrolment rules, although if that is the reason given you should ask for an explanation.
Schemes that have needed to make big changes to cope with modern working and family patterns have sometimes found this the easiest way to make the changes, even though the new arrangements are more or less as generous as those of the scheme they are replacing.
But it's right to ask some very hard questions, as more often than not it means a worse deal is on offer.
Particularly in recent years, it usually means the employer wants to close a relatively generous salary-related scheme and replace it with a less risky (to the employer) and probably less generous 'money purchase' scheme.
In this case, the employer may be doing different things with the old scheme. These could be:
- keeping the old scheme going as usual for its current members, but not letting anyone new join. Members of the old scheme can of course resign and join the new scheme instead if they wish;
- keeping the old scheme going but only to pay the benefits already built up by existing members. For future pension rights, everyone will have to join the new scheme. The old scheme is said to be 'closed for future service'; and
- winding up the scheme altogether. Solvent employers can only wind up a scheme if they buy out benefits in full. They must therefore ensure that you do not lose out in any way on the pension benefits you have built up already.
What you should do about transferring a pension you have built up already will depend on the alternatives offered and your personal circumstances and preferences.
A good employer will provide clear information and access to individual advice from independent outside advisers.
As very rough rules of thumb (and your circumstances may be different):
- it is usually better to stay a member of a salary-related scheme than join a new money purchase scheme;
- it is usually better to join a new scheme for future service if the old one has been closed. Even if it is less generous, it will probably still be better than making your own arrangements;
- it is usually a mistake to withdraw your money from an old salary-related scheme and transfer it to a new money purchase scheme; and
- you will need independent professional advice before agreeing to transfer from an old salary-related scheme to a new one. The employer ought to pay for this.