Author Ben Leonard
It’s been revealed that around three million members who are saving with final salary pension schemes could miss out on around a fifth of their future income because their employers have made unaffordable promises.
Extreme pressure to meet pension schemes obligations
Many employers have offered their staff a “final salary” pension scheme as part of their employment, but are coming under extreme pressure to meet these obligations, according to the Pensions and Lifetime Savings Association.
The PLSA said that employers were struggling due to a range of factors, including the fact that people are now living longer than expected, so guaranteed pensions are more expensive to provide.
Companies that are unable to pay the pensions that they are obligated to cover for their staff will have their pensions schemes covered by a service called the Pension Protection Fund.
However, staff that have their pensions covered in this scheme can find that they receive up to a fifth less of what they were originally promised by their employer.
Pensions at risk
The report, conducted by the PLSA, found that the most vulnerable employees only had a 50 percent chance of not becoming insolvent over the next thirty years, long before many pensions will start to pay out.
The report also found that of the pension schemes that were identified as being vulnerable, around 60 percent of these were in the manufacturing, retail, and financial services sectors. The other 40 percent came from general services, transportation, construction, and farming.
Ashok Gupta of the PLSA said:
“More than 11 million people rely on defined benefit pension schemes for some or all of their retirement income but there is a real possibility that without change we will see more high-profile company failures such as BHS or Tata Steel.”
“It is vital that action is taken to address covenant risk, underfunding and the current lack of scale in the majority of schemes.”
One option for many small businesses could be the pooling of their pension pots into larger “superfunds”, the PLSA said. Smaller companies would pay a fee to transfer their final-salary pensions into a larger fund, but this would then allow these larger “superfunds” to have bigger investment opportunities.
However, pensions consultant John Ralfe blasted the idea of a superfund as “outrageous”, saying that there was “no crisis in defined benefit pensions, so there is no need for crisis measures” owing to a well-funded lifeboat system for collapsed schemes.
He added that
“the PSLA is trying to undermine all the safeguards put in place for members since the 2004 Pensions Act. It wants to turn the clock back to the days when companies could walk away from their pensions without fully funding them.”
Employers have pumped in an extra £120bn in special payments to try to plug financial holes in these schemes, but the combined deficit of the UK’s 6,000 schemes remains at £400bn.
However, more than three million members of various pension schemes also faced an uncertain fiscal future.