Working out what kind of workplace pension you have

It’s important to know exactly what kind of pension you have if you want to change it. Here we look at the different types of workplace pensions, putting industry jargon into everyday language.

There are two types of workplace pensions: ‘defined benefits’ (DB) pensions, where you know what you will get at the end, and ‘defined contributions’ (DC) pensions, where you know what you are putting in but not what your final pension will be.

Defined benefit (DB) pensions

If you have a defined benefits scheme, often referred to as a ‘final salary’ pension, you are one of the lucky ones. You will get a consistent, known income once you retire based on your final or average wage, and how long you worked for the company providing the pension.

DB pensions were once common but are now closed to most new employees. If you have started working for a company within the last twenty years you are very unlikely to have a DB pension – companies say they are too expensive to fund.

Despite these advantages, though, the majority of DB pensions were set up well before climate change became such a pressing political issue, and are very unlikely to be green. You can check out just how sustainable your DB pension is by contacting your HR department or the pension trustees (these people run the pension on behalf of all members and will include some employees).

So if you want change you’ll have to ask for it. Unless, that is, you have a public sector DB pension. These don’t accumulate (build up your money) in a fund like private sector DB pensions – they are just paid for through general taxation.

Defined contributions (DC) pensions

With a DC scheme regular payments – or ‘contributions’ – are paid into your pension fund. The size of the pension you receive when you are entitled to draw it will depend on how much money has built up in the fund. This is why you need to keep an eye on how your pension is performing throughout your working life.

Your employer helps you, topping up your own contributions to your fund, and the government gives tax relief on the payments you make – see ‘Could I lose out by switching to a green pension’ in the FAQ for more.

‘Master trust’ and ‘contract based’ DC pensions

Your inclusion in a DC pension scheme may well be due to the government’s auto-enrollment rules for workplace pensions, which have been gradually introduced since 2012 to ensure all employees are entitled to a pension. These are sometimes called ‘master trust’ pensions because all participating companies are in the same basic plan. Other companies have their own ‘contract based’ pensions, although these tend to be quite similar to each other, usually ‘off the shelf’ schemes picked from a narrow range of big pension providers like Standard Life, Aviva, and Legal and General.

If you started work recently, particularly for a small or new business, you are probably in a master trust scheme. Another sign is if you are paying 4% of your salary every month into your pension. Check by looking for the term ‘master trust’ in your pension documentation, or by asking your pension provider. Once you know that, you can ask what your pension is invested in, and what options you have for moving to greener options.

Other DC pensions

Other types of DC pensions, especially older ones with big corporate employers, don’t fall into the master trust schemes, but are often on a similar big pension brand platform. The problem is that there are a lot of different plans created over many years and it is confusing to work out which one you have. Others were created independently by the employer, usually now being administered by one of a few big third party providers, most often Towers Watson or JLT.

For nearly all these pensions, you can get some access through an online portal. However you may still find it difficult to see where your money is invested. Often you will need to make a specific request to the pension trustees or the provider for this information. And when you do, unfortunately you may not like it much and find you don’t have good green options, especially if it is an older pension scheme. If so, ask them to consider investing in more sustainable funds. And like all employees you have the right to put yourself forward to be a trustee yourself!