A significant number of pension schemes make an allowance for the State pension when providing a pension from the scheme. This is known as ‘integration’ in the private sector and ‘coordination’ in the public sector. An integrated scheme looks at the State pension as part of the total pension package promised to employees on retirement. One reason for this is that both employers and employees make Pay Related Social Insurance contributions and these, in turn, entitle scheme members to certain social welfare benefits, including the State pension.
Integration is used as a means of taking into account the benefits payable under the Social Welfare system to calculate:
- the amount of pension payable from a pension scheme, so that the combined pension from both sources (State pension and occupational pension) is at the level being aimed for in the scheme’s design; and
- the level of contributions payable by the employee towards the cost of their occupational pension, so that the contributions payable to an occupational pension scheme reflect the offset from scheme benefits to allow for the State pension.
Typically this is achieved by using an offset from salary in respect of the State pension and calculating pension benefits and contributions based on this lower ‘pensionable salary’.