All change in the company scheme?

PENSIONS: as the state safety net disappears, we examine the options for boosting your retirement funds

There has been a quiet revolution in the generally dreary world of pensions. It may not affect you now but, if you're in a company pension scheme, it is likely to have a huge impact on your financial well-being when you retire.

The good news is that you're likely to be better off. The Pensions Act, which takes effect next month, is a driving force behind the changes. The net effect is that more and more companies will be switching their pension plans to money purchase schemes rather than the traditional "final salary" schemes.

Companies can choose between schemes but, under both, you are allowed to invest up to 15 per cent of your annual salary. It's what you get out that can be very different.

Under a final salary scheme your pension will be based on how long you've been in the scheme and the amount you're earning when you retire. Generally, you get 1/60th of your final pay for each year you've been in the scheme, with a maximum payout of two-thirds of your final salary. So, to get the maximum pension, you would have to have been a member of the scheme for 40 years.

A money purchase scheme overcomes those difficulties because the payout depends on how much is put in, although investment performance is equally important. So if you put in enough cash, and often your contributions will be matched by your employer, you should feel more secure about receiving a reasonable pension fund.

However, it's not for your benefit that companies such as BP, Glaxo Wellcome, Legal & General and Lloyds Bank have decided to take the money purchase route. The switch is being made in the name of cost savings.

The wealth of pensions legislation in recent years has substantially increased the administrative and financial burden on companies running occupational pension schemes, especially those operating final salary schemes. The latest changes in the pension laws could be the final straw for many firms.

Under the new Pensions Act a "minimum funding requirement" is being introduced for final salary schemes. If the company's pension scheme assets fall below 90 per cent of its liabilities, the employer will be required to make up any shortfall.

The minimum funding requirement may also lead to schemes adopting a more conservative investment strategy to ensure they do not fall below the fully funded level. This could lead to poorer investment returns over the long term, forcing employers to top up their schemes if they fail to meet their liabilities.

There's also a new pensions regulator on the prowl - the Occupational Pensions Regulatory Authority - with greater powers than the existing Occupational Pensions Board.

For instance, Opra will require a company's final salary schemes to have an actuarial valuation every three years to ensure they are still within the fully funded level. All this means more administration and, therefore, more costs. It's hardly surprising, therefore, that many firms are reviewing their pension provision for employees.

Since the Pensions Act has much less effect on money purchase schemes, many companies are considering switching. For starters, money purchase schemes have no minimum funding requirement. On top of that they have escaped the final salary schemes' requirements of an appointed actuary, annual accounts and trustees' reports.

The change to money purchase schemes will be a slow one. It's an extremely complex business and companies will need to consider all the implications. Contracts of employment, for instance, will need to be examined to ensure the switch means no breaches of contract. In addition, those close to retirement will need some guarantee that they won't be worse off when they retire. That's why many companies will choose a phased switch, keeping existing employees on the final salary scheme and putting new staff members on to a money purchase scheme.

Some may even offer employees the choice of switching, but check first that your benefits will not be impaired.