1000 Pensions at Risk

If you are a member of a final salary scheme, or were, I’m sorry to bring you some sorry news of a new report from the Pensions Institute, part of Cass Business School, which highlights the acute pressure faced by many private sector defined benefit (DB) schemes and their trustees as they strive to meet their long-term liabilities.

The report, “The Greatest Good for the Greatest Number“, predicts that the businesses of hundreds of employers will become insolvent well before the end of their recovery plans, under which the trustees and sponsor agree contributions to make good the deficit over an agreed number of years. On insolvency, these schemes may have insufficient funds to pay members’ pensions in full.

In theory the Pension Protection Fund would support those schemes that become insolvent. However it is important to understand that this does not always apply and doesn’t cover all of the pension benefits in any event.

The long-term problem

The research found that of the approximate 6,000 DB schemes in the PPF Index, most of which are closed, as many as 1,000 schemes are highly vulnerable to the risk of significant underfunding and the sponsor’s insolvency as scheme funding levels continue to weaken. Around 600 schemes – 10% of the total – are unlikely to ‘ever’ pay off their pension scheme debts. The businesses of up to a further 10% are at risk of failure due to the DB deficit. Quantitative Easing (QE), low interest rates, and low gilt yields are all considered to add significantly to the problem, especially as gilt yields are a key factor in the assumptions used for valuations.

Key Points

  • Up to 1,000 of the 6,000 Defined Benefit Pension Schemes are at serious risk of falling into the Pension Protection Fund.
  • Of this, members of 600 schemes may only receive PPF compensation; many sponsors are expected to become insolvent in the next five-to-10 years
  • The remaining 400 sponsoring employers might initially survive, but may eventually fail if they are not able to off-load their pension obligations
  • the report challenges the ‘flawed assumption’ that, in time, the majority of these sponsors will meet their pension promises in ful
  • Planned and coordinated action now could secure better outcomes for members than the PPF compensation floor while securing jobs and freeing up businesses to create growth

So, I’m sorry to report that we may all become rather more familiar with the Pension Protection Fund unless action is taken and with so many financial pressures, one can see why it isn’t. Of course, not everyone has a final salary pension scheme and it should be said that many of those in existence are very well funded. However the key lesson in this that applies to everyone is that providing income for a lifetime is expensive, getting your pension income sorted out, in whatever form, is important to address and why you need a good financial plan.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk