(This archived guidance relates to HMRC discretionary
practice before the 6th April 2006. For current guidance on
Registered Pension Schemes see the Registered Pension Schemes
Manual)
The employer’s contribution has historically been
expressed either as a level annual premium (payable either
throughout the life of the scheme or until the next actuarial
review) or as a percentage of salary. The level method spreads the
cost evenly over the life of the scheme: the percentage method
results in a lower initial outlay but becomes increasingly more
expensive as salaries rise over the years. The level annual
contribution method can lead to excessively high levels of funding
in the early years, in effect the funding of future service in
advance. In money purchase schemes and arrangements in particular,
this can present problems (see
PSI20.1.16 and
PSI13.3.6-7). Contributions
must therefore be calculated as an annual percentage of salary
rather than on the level annual concept. But level annual
contributions are acceptable provided they do not produce funding
levels above those acceptable under the basis in Appendix VIII of
PN. More detailed guidance on this can be found in Section 4 of
this Part. (
PSI1.4.1)
