Cash balance plans
How cash balance plans work
A cash balance plan is typically run, on behalf of the employer, by the Board of Trustees, who is responsible for all aspects of the scheme, including paying out benefits to retired members. The daily management of the scheme is typically undertaken by the Scheme Administrator, who reports to the Board of Trustees.
Your employer decides the levels of contributions to the cash balance plan. Contributions are usually expressed as a percentage of your earnings. The pension scheme’s Rules will define what is meant by ‘earnings’.
As an example, some schemes do not count additional earnings, such as overtime, commission, bonuses or the value of benefits in kind (other benefits that are not paid as cash to the worker, such as company cars, season ticket loans, medical insurance etc).
The scheme may also only count a proportion of your weekly or monthly wage or salary. The amount of your earnings that are used towards calculating retirement benefits is often called ‘pensionable earnings’.
Your employer will contribute to the scheme, but may also require that you also contribute, at least a minimum level. If you decide to contribute more, your employer may decide to ‘match’ the additional contributions and make higher contributions for you.
Contributions made to a cash balance scheme by you and/ or your employer are invested in your individual ‘pot’, which is held in your name, in the same way as a defined contribution scheme.
Both you and your employer receive tax relief on contributions made, subject to certain conditions.
Investment of the fund and contributions
The Board of Trustees will invest the funds held in each member’s pot and contributions, as they are received, in a range of different assets selected to support the minimum level of investment return.
If the actual investment return earned on the pots in a particular year is less than the minimum guaranteed level, your employer will make further contributions to top up each member’s pot to the minimum guaranteed level.
If the achieved investment returns are higher than the minimum guaranteed level, your employer may hold back some, or all, of the excess from individual members’ pots and then use this amount to top pots up in future years, when the minimum guaranteed investment return is not be achieved.
This structure means that it’s the employer, and not the members, who is exposed to the scheme’s investment risk during the period up to your retirement. This is a feature of defined benefit schemes.
Drawing your benefits
When you decide to retire and draw benefits, the accumulated value of your pot is used to provide an income. A tax-free cash lump sum may also be taken with a reduced pension income.
While the income can be taken in a number of different ways, purchasing an annuity to provide a lifetime income is probably the most common method. You can select which features are included in the annuity, including payment frequencies, the provision of an on-going income for dependants after your death and increases in the income each year, to offset the effects of inflation. Further details are available in the Retirement choices section.
Some employers may also guarantee a minimum level of income that your pot will provide at retirement. Should there be a shortfall, the employer will make further contributions to your pot so that the minimum guaranteed level of income is provided.
The guarantees provided by your employer for minimum levels of investment return each year and, where applicable, a minimum income level at retirement, are dependent on the employer being able to continue to afford to pay for these guarantees. If your employer becomes insolvent, it may not be possible to continue to provide the guarantees, although the Board of Trustees will try to ensure that the levels of guarantees are maintained. The scheme rules will give more details on what will happen if your employer is unable to support the guarantees provided.
How can I find out what guarantees my cash balance plan offers?
You would normally have been given a booklet when you joined the scheme. This booklet would give you details of the guarantees. If you no longer have the booklet, contact the Scheme Administrator and ask for details.
Can the employer change the level of the guarantees?
Yes. Sometimes it may be necessary to change the guarantees and benefits under the scheme because of changes in legislation. In other circumstances, the employer may need to consult with some classes of the scheme’s members before making changes that affect members adversely. If it became necessary to, say, reduce the level of guarantees, the employer could decide that the reduced levels will only apply to new joiners to the scheme after a certain date.
If the employer is making changes that improve members’ benefits without subjecting them to higher costs, the employer does not need to consult with members, but should still inform all members of the changes.
I have lost the contact details for the Scheme Administrator, what can I do?
If you have lost track of your pension details, the Pensions Tracing Service can help you to find the current contact details. This is a free service and more details are available here.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.