Money: Firms that opt-out of pension contributions

Because many of us don't make a point of reading the small print on our company pensions, some employers have been running schemes that seem to offer a good deal to their employees without paying a penny in voluntary contributions to the fund. Now hundreds of these tight-fisted employers look set to be caught out by a change to company pension schemes.

The problem affects a type of money-purchase company scheme set up to build up an alternative pension to the state earnings-related pension scheme (Serps). The attraction of these contracted-out money purchase schemes (Comps) is that staff and employers pay reduced National Insurance contributions. The Department of Social Security then allows employers to pay an annual rebate of National Insurance contributions into each employee's Comp fund. The rebate is currently fixed at 4.8 per cent a year, made up of 3 per cent from the employer and 1.8 per cent from the employee. The employee's contribution is boosted by basic rate tax relief and many employees have been convinced they are getting a good cheap deal. They are not.

Allied Dunbar's pensions development director Tony Reardon isn't impressed by firms which operate these so-called "bare" schemes, which just collect NI rebates without adding any extra contributions to boost the fund. He says: "This is just redirected National Insurance money that would have been paid anyway. Employers can pass this off as a genuine pension contribution but the staff member could have put the 4.8 per cent into a portable personal pension."

Firms who offer this poor-value deal to staff are, however, likely to be caught out, as changes to the pension regulations next April will mean that it is more efficient to transform these company schemes into group personal pension plans. From next April, the annual rebate paid into Comp schemes will be lower than the rebate paid to people who have opted out of Serps through a personal pension plan. Employers will pay a basic rebate of 3.1 per cent into staff Comp schemes. The DSS will top this up with age-related payments at the end of the year. For a worker aged 45 the total rebate is 8 per cent, with the balance of 4.9 per cent paid by the DSS.

Tony Reardon says: "If the employer has only been paying 4.8 per cent into the Comp scheme then if they replace it with a personal pension it will be clear that they don't pay any of their own funds. Even if they are putting in 8 per cent a year, then that's only 3.2 per cent in real contributions. It will look bad even if they spend the same."

The move is intended to help older people who have contracted out of Serps. Until now, many older people working part-time or on lower incomes have found themselves in a position where they would be better off re- joining the state scheme - which will be expensive for the DSS.

The changes may well spell the end of the road for Comps. Earlier this month Scottish Amicable announced that they intend to withdraw from the market. The firm is a market-leader and manages about 2,000 schemes. Its pensions marketing manager, John Glendinning, says the schemes are quite complicated to run and other options now provide better value for money.

Sun Life is also pulling out of Comps and encouraging firms to transfer their business to group personal pension plans. Several other pensions firms are rumoured to be unhappy.

Some pensions managers say they realised back in 1988 that personal pensions would be the Government's favoured vehicle for our retirement funds. Even before the recent rebate cuts, state payments into personal pension schemes were higher - people over 30 get 1 per cent extra paid into their fund if they have left the state pension scheme through a personal pension.

These changes confirm that the Government is now quite clearly favouring portable personal pension provision for people who want to opt out of the state earnings-related pension scheme, rather than the money-purchase type of opted-out company schemes operated by individual employers.

Many money purchase schemes have been in existence for many years. They offer members a pension based on the amount of money put into the scheme rather than earnings. The final pension also depends on how much the investments grow.

In 1988, when the Government started to encourage people to leave the state earnings related pension scheme and set up pension plans, it also allowed money purchase schemes to opt out of Serps. For a while, it seemed that they would enjoy the same benefits as personal pensions but the latest cuts in rebates have sounded the death knell for Comps.

But if you have a Comp, don't panic. The changes are likely to be slow - Scottish Amicable won't be asking firms to select alternative schemes until next April. If your retirement funds are invested in a Comp, check how much your employer has been putting in to the fund. Then get some independent advice on whether you have enough invested and where you should put your money in future.

Independent financial advisers will be asked to give advice to all scheme members. Even with the increased rebates, some people will still be better off rejoining Serps in the final years of their working life.