Issued: 10 May 2004
Making sure your pension scheme meets your part-timers' needs
Historically, the needs of part-time staff have not been a major factor in pension scheme design. The traditional model of an 80ths or 60ths final salary scheme was aimed firmly at full-time workers who stayed with their employer for many years. Indeed, while it was still considered legal to do so, many schemes excluded part-time staff from membership altogether. Since this has been challenged in the courts, schemes have opened their doors to part-time workers, but these often prove to be poor value to this proportion of the membership.
Today’s labour market needs to be more flexible and part-time workers are an increasingly important part of the workforce. This applies especially to the area in which The Pensions Trust operates – the charitable, social, educational, voluntary and not-for-profit sectors – but also to commercial organisations and the public sector. While some employers provide defined contribution benefits to this group of workers, there is an alternative – the CARE scheme.
Why the 'old model' doesn’t work
In order to appreciate the advantages of CARE schemes for part-time employees, we need to understand why final salary schemes can be unsuitable.
In a final salary scheme, only the last few years of earnings are taken into account when calculating a member's pension. However, these may not necessarily be the highest earning years. This is particularly relevant to part-time employees who often have irregular earnings throughout their career. In addition, an increasing number of workers are 'easing themselves into retirement' by reducing their hours gradually before they leave. Again, this can have an adverse effect on their pensionable salary. In both cases, these members get poor value from a traditional final salary scheme.
The CARE approach
One solution to providing pensions for part-time workers is a career average revalued earnings (CARE) scheme. Under these schemes, each year the member is credited with a pension, which is expressed as a proportion of that year's earnings. For example, The Pensions Trust’s CARE scheme provides 1/80th of earnings each year. This pension is then increased in line with retail price inflation until the pension comes into payment. This process is then repeated each year until the member leaves or retires.
Other benefits of the CARE approach are:
- Because pension is based on actual earnings, members always receive the full benefit of years when they have received higher earnings
- Members who have fluctuating salaries or who work part-time will not be penalised by any drop in earnings close to leaving or retirement
- Part-time employees often have more opportunity to work overtime than their full-time counterparts. In many final salary schemes overtime is not included in pensionable earnings. Under a CARE scheme it is a simple matter to make all earnings pensionable – an increase in hours worked shortly before retirement will only affect subsequent pension accrued.
The attached tables (please click on the relevant link) show the difference between the final pension of a part-time worker under a CARE scheme and an equivalent final salary scheme.
Benefits for the employer
The benefits of CARE schemes are not all in favour of the member – whether full or part-time. In recent years, a number of companies have adopted this approach, in preference to a defined contribution scheme, as a way to control pension costs. Because the value of benefits increases in line with price inflation rather than earnings, the future cost of benefits is easier to predict. In addition, some of these schemes (though not The Pensions Trust's) cap inflation increases at 5% p.a.
Another option is to share the cost more equally with the member. For example, in The Pensions Trust's CARE scheme, employers currently pay 10% of pensionable pay. Members pay an age-related rate calculated as one-tenth of their age, so a 35 year old would pay 3.5% of their earnings and a 48 year old 4.8%.
Finally, a CARE scheme also has administrative advantages, as the benefit structure takes account of fluctuating earnings. There is no need to record changes in working hours, as benefits are based upon actual earnings rather than service.
About The Pensions Trust’s CARE Scheme
Date started: 1 October 2001
Participating employers (with contributing members) 25
Members:
- 365 Active
- 25 Deferred
- 1 Pensioner
For further information, please click here.