Types of DB Scheme Closure
Not all scheme closures are the same. There are three distinct types, each with different implications for your pension benefits:
1. Closed to New Members (Soft Close)
The most common form of closure. New employees cannot join the DB scheme and are enrolled into a defined contribution (DC) alternative instead. Existing members continue to accrue DB benefits as before. Your pension rights are completely unaffected.
2. Closed to Future Accrual (Hard Close)
No members — including existing ones — can build up any further DB pension. Benefits earned up to the closure date are preserved and will be paid at your scheme's normal retirement age. You will typically be moved to a DC scheme for future pension saving.
3. Wind-Up (Full Closure)
The scheme is terminated entirely. All benefits must be secured, either through buying annuities from an insurance company or through a transfer to the Pension Protection Fund (PPF). This typically only happens when the sponsoring employer becomes insolvent.
| Closure Type | New Members Join? | Existing Members Accrue? | Benefits Preserved? |
|---|---|---|---|
| Soft close (new members) | No | Yes | Yes |
| Hard close (future accrual) | No | No | Yes — benefits to closure date |
| Wind-up | No | No | Secured via annuity or PPF |
Your Legal Rights When a Scheme Closes
UK pension law provides several important protections when a DB scheme closes:
- Accrued benefits are protected — your employer cannot retrospectively reduce the pension you have already earned
- Consultation requirement — employers must consult affected members for at least 60 days before closing a scheme to future accrual
- Revaluation of deferred benefits — preserved pensions must be increased in line with statutory requirements (typically CPI-linked, capped at various levels depending on when benefits were earned)
- Transfer rights — you retain the right to transfer your benefits to another arrangement
What Happens to Your Preserved Benefits
When a scheme closes to future accrual, your preserved (deferred) pension is calculated based on your pensionable salary and service at the closure date. The pension is then increased each year until you reach retirement age:
- GMP benefits (pre-1997) — revalued in line with the scheme rules, often at a fixed rate
- Post-1997 benefits — must be revalued by at least CPI capped at 5% per year
- Post-2009 benefits — must be revalued by at least CPI capped at 2.5% per year
Once in payment, your pension must also be increased annually. The minimum increase is CPI up to 2.5% for post-2005 benefits, and CPI up to 5% for benefits earned between 1997 and 2005.
The Employer's Obligations
Even after closing a scheme, the sponsoring employer remains responsible for funding it. The scheme trustees will continue to manage the fund and ensure it can meet its obligations to pay all member benefits. Regular actuarial valuations assess whether the scheme has enough assets to cover its liabilities.
If the scheme is underfunded, the employer must agree a recovery plan with the trustees to make up the shortfall over a reasonable period. The Pensions Regulator oversees this process and can intervene if necessary.
Should You Transfer Out of a Closing Scheme?
Receiving a closure notice can feel alarming, but it does not necessarily mean you should transfer your benefits elsewhere. Consider:
- The scheme's funding position — a well-funded scheme run by a financially strong employer is likely safe
- PPF protection — even if the employer fails, the PPF provides substantial compensation
- Your age — if you are close to retirement, keeping your guaranteed DB benefits is usually advantageous
- Your overall retirement plan — consider whether you have sufficient flexibility from other sources (DC pensions, ISAs)
If your DB pension is worth more than £30,000, you must receive regulated financial advice before transferring. An adviser can assess whether a transfer is genuinely in your interest. See our guide on whether transferring a final salary pension is worth it.
Replacement DC Pension Arrangements
When a DB scheme closes to future accrual, the employer will typically offer a replacement DC pension. Key things to check in the new arrangement:
- Employer contribution rate — is it comparable to what they were contributing to the DB scheme?
- Investment options — are there a range of well-diversified, low-cost funds available?
- Charges — total annual charges should ideally be below 0.5%
- Death benefits — what happens to your DC pot if you die before retirement?
Next Steps
If your DB scheme is closing, request an up-to-date benefit statement showing your preserved benefits and projected pension at retirement. Ask the trustees about the scheme's funding position and any employer recovery plans. If you are considering a transfer, speak to an FCA-regulated pension adviser who specialises in DB pension advice.