Pensionable salary

D

dfordog

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I am in an occupational pension fund. My employer uses a figure called "Pensionable salary" to calculate employee/employer contributions where Pensionable salary = salary - (1.5 x State pension). Why would an Occupational Pension scheme use this Pensionable salary figure? It doesn't correspond with the pension fund managers projections on their portal where a 10% contribution would equal 10% of salary.
 
The use of such "pensionable salary" figures goes back to Defined Benefit pension schemes where the eventual pension was calculated to include the State Pension, e.g. "With 40 years' service you'll receive a pension of 50% of final salary, inclusive of the State Pension." That was far cheaper for the employer to fund for than funding for a full 50% of final salary.

It looks like your employer has continued this terminology to reduce the cost of their contributions to the scheme. There's no obligation on an employer to make any employer contribution at all, so if they choose to make a contribution of x% of pensionable salary, rather than x% of real salary, that's up to them.

That said, the fund manager's projection should reflect the true position.
 
in fairness I don't think its a cost issue.

Employers who have both a DB scheme closed to new entrants and a DC for newer employees often keep the contribution rule the same so that the employee contribution is the same regardless of what scheme you are in. Otherwise DC employees may complain that they are contributing more than their fellow workers. Especially so if the DC scheme is compulsory or necessary to obtain death benefits.
 
What's the situation re new schemes - say a multi-national decides to set up here - any reason for them to use Pensionable Salary as described above?
 
JimmyB99 said:
What's the situation re new schemes - say a multi-national decides to set up here - any reason for them to use Pensionable Salary as described above?
Click to expand...
No. It is old school. They probably never heard of it.
 
Thanks Towger,

Reason for question - I came across a plan that was set up just a few years ago - where there were no legacy issues as described above - and which adopted the social welfare offset approach. It was set up by one of the large consultancies so presumably they had some rationale?
 
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