Hybrid Pension Schemes (or Underpins)

Hybrid Pension Schemes (or Underpins) were an important element of some older pension contracts. Over the last three or four decades there has been a large move by companies away from defined benefit (i.e. ‘final salary’) pension schemes due to the ‘blank cheque’ which they required to guarantee their employees’ pension benefits. 

These schemes were replaced by defined contribution (i.e. ‘money purchase’) pension schemes.

However, in an order to placate employees some companies introduced a defined benefit ‘underpin’ to their defined contribution pension schemes.

This ‘underpin’ was at a fairly low level but it gave the employees security that they would receive at least a known minimum pension irrespective of the performance of their pension fund. If you have an old pension plan which contains an Underpin or is referred to as a Hybrid Pension Scheme then this section is for you.

Hybrid Pension Schemes (or Underpins)

Historically, a number of defined contribution (also known as ‘money purchase’) plans were established with defined benefit (also known as ‘final salary’) underpins. In these schemes, when you reach the normal retirement age under the scheme or wish to transfer your deferred benefits to another scheme a test is carried out to see which of the benefits (defined contribution or defined benefit) is more valuable and which one should apply.

Originally the intention behind these designs was that the defined benefit underpin would only bite in a limited number of circumstances. With reductions in investment returns over recent years, these underpins have provided a more valuable option for the client.

The favoured approach was to use a With Profits type fund with the expectation that the amount invested would be sufficient to provide the defined benefit underpin at retirement. If this was not the case, the insurance company had to meet any additional cost.

You may see a reference to RST in some documentation. This refers to a Reference Scheme Test which has to be applied by the scheme to ensure that a minimum level of benefits is paid out to you.

What you should check

  • Does the scheme provide a guaranteed level of income on reaching retirement age irrespective of what funds are available from the plan?


  • Does the policy schedule or product provider make reference to a Reference Scheme Test (or RST)? If so this would normally indicate a form of Safeguarded Rights.





This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.