The pension pain endured by employees of companies such as BHS and British Steel have left many workers and pensioners doubtful about whether the company pensions they have been expecting will be paid in full if their employer gets into trouble. Although BHS’s meltdown is not typical, every year companies go to the wall at a time when there is insufficient money in the company’s pension scheme to meet the full cost of all the pension promises that have been made. In such a situation, the Pension Protection Fund (PPF) safety net comes into play. The PPF takes over the assets of a broken pension scheme and then pays benefits to pension members according to a set of rules.
Broadly speaking, those who are above pension age when the scheme goes into the PPF get 100 per cent of their pension rights, and those under pension age get 90 per cent of their pension rights. However, the PPF pays annual increases (‘indexation’) only in line with the statutory minimum, and this may be lower than the increases the scheme would have paid if it had kept going. In other words, while the PPF is an excellent scheme and offers a good level of security, it generally doesn’t offer as good a deal as the original pension fund would have.
So how worried should scheme members be? And what can be done to make sure more people get their pensions paid in full? According to a recent report from the Pensions and Lifetime Savings Association (PLSA), around three million people are in in final salary type schemes where there is only a 50 per cent chance that pensions will be paid in full. This is because the sponsoring employer is struggling financially and the pension fund is in deficit – it lacks the funds needed to meet all the pension promises that have been made.
The PLSA suggests that one way to improve pension outcomes would be to move from a situation where there are thousands of relatively small schemes to one where there are fewer, bigger schemes, known as ‘superfunds’. The report argues that big schemes can be run at a lower cost per member and generate a better investment return. This is because they can afford to employ specialist investment advice that small schemes cannot, and because they can invest in a wider range of assets (such as infrastructure) – which is more challenging for smaller schemes.
The report recommends that employers should be able to move their existing schemes into a new superfund, pay over a lump sum to reflect any deficit in the scheme and then walk away. From the point of view of the employer, this might be preferable to having to go on paying contributions into a final salary pension scheme for decades to come. If the new superfund operates more cost-effectively and produces better returns, such a move may also increase the chance of members’ benefits being paid in full.
This is an interesting idea, and it is certainly true that, compared with many other countries, the UK has a very large number of small pension schemes, not all of which are run efficiently. However, we are unlikely to see major changes anytime soon. The government has promised a white paper on final salary pensions, but it is not due to be published until February 2018. Moreover, because of all the time being spent debating Brexit legislation, MPs have little time to consider new pension laws, so a new law allowing the creation of superfunds might not be considered until 2019/20 and implemented a year or two after that.
In the meantime, the work of the Pensions Regulator in keeping an eye on employers and making sure they keep up with their pension contributions is likely to provide the best guarantee that pension scheme members get the benefits they expect.
However, pension members could protect themselves more actively by transferring out of their company pensions if the pension is not yet in payment and they are concerned that their employer might go to the wall. But this is a big decision to make, with far-reaching consequences, so it should only be taken on the basis of impartial financial advice.
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