How Safe Is Your Pension

Defined Benefit, or Final Salary Schemes, in the UK have a collective deficit of £253 billion as at the end of March. This is reported by the government sponsored Pension Protection Fund (PPF) and is an all-time high, being up from £67 billion a year ago.

This is the collective deficit of over 90% of UK schemes, traditionally thought of as the best type of pension scheme to be a member of due to the generous contributions made by employers and guarantees they include.

This does not mean that all of these schemes will end up in the hands of the PPF, but an increasing number are. As investment markets recover these deficits should reduce but this may take several years and in the meantime the position for many schemes could get worse. Firms could also make additional contributions to their schemes to reduce the deficits but how likely is this in the present economic climate. In addition to this it is a worrying fact that following the collapse of Woolworths and Lehman Brothers the PPF is itself in deficit to the tune of £500 million and with the latest scheme to be referred to it this is estimated to increase to £1 billion.

If a pension scheme is referred to or asks the PPF for help it enters into an assessment period, which can take several years to determine. It is then either taken on board by the PPF to continue to make the pension payments or is released to continue as before, perhaps with additional funding from a parent or another company.

For members who have reached the retirement age of the scheme the payments (compensation) will be 100% but for the majority of members below the scheme’s normal retirement age it will be 90%. The compensation has an overall cap, which changes each tax year and is currently £30,856 income per year. This is based upon an age of 65, for under 65s it will be less than this and for over 65 it will be greater. Indexation applies to the compensation but this may be at a lower rate than the original scheme.

If the pension from your company scheme is less than this cap, then you will receive 90% of the pension each year, however if the pension was greater than this then you will receive less than 90%. For example if you are 65 and your pension would have been £60,000 per year from the scheme the compensation scheme will pay you £27,771 which is only 46%.

During the assessment period and, of course if responsibility is transferred to the PPF, the member loses all rights that they formerly had to transfer the value of their pension benefits to another pension arrangement, either to another employer or to a plan in their own name.

So it could be more important than ever before to ascertain the position of your own company’s pension scheme and consider whether your future retirement could be adversely affected. Maybe you should be asking your scheme whether it is fully funded or even to obtain a value of your benefits in the form of a transfer value. This could then be transferred to a plan in your own name where you have full control over it.