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What is Pension Reversion?

John Lister
John Lister

Pension reversion is when an employer closes an overfunded company pension scheme in order to get ahold of the excess money. It will then usually replace the scheme with a new type of pension arrangement for employees. In many, and arguably most, cases the replacement will not be as advantageous for the employees.

To understand pension reversion, you must first understand the difference between the two main types of pension scheme an employer can offer to employees. In a defined benefit scheme, the employees will be guaranteed a certain pension upon retirement, usually based on their length of employment and the salary they are earning when they retire. It is then up to the employer to make sure the pension fund has enough money to pay for this pension.

Woman holding a book
Woman holding a book

In the other type, a defined contribution scheme, the employees only know how much money will be invested to produce the money for pensions. How much pension they actually get upon retirement depends on how well these investments perform in the meantime. It will also depend on the going rate for annuities when they retire. An annuity is a financial product which pays a set amount each year until the recipient dies. With both types of pension scheme, the usual method is to take the pension fund which has built up for the employee and use it to buy an annuity, which provides the pension itself.

A company offering a defined contribution scheme must keep a close watch on the money in the scheme to make sure there is enough to buy the annuity needed to provide the guaranteed pension levels. If the amount of money is too low, the company will have to pay extra into the scheme, which can cause it financial difficulties. But if the amount of money is consistently much higher than needed, the company may want to free some of it up to help the business.

In this situation, the company may consider pension reversion. This is a fairly drastic measure as it means closing the scheme completely. The company will usually take the money in the fund and buy annuities immediately which will pay the promised level of pensions when employees retire. The company will then take the remaining cash for itself.

Although pension reversion usually means the employees should get the promised level of pension, it can still be an unpopular move. One reason for this is that if employees have made their own contributions to the scheme, they may feel it unfair that their money has effectively been used to make a profit for the employer. Another reason is that the annuities which are bought are often no longer covered by the relevant pension guarantee schemes. In the United States this scheme is the Pension Benefit Guaranty Corporation Scheme. This exists to make up the shortfall if a company pension scheme collapses and is unable to pay out its promised pension.

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