Once upon a time, many moons ago, final salary pension schemes were the gold standard of pension provision. Guaranteed, inflation protected incomes for life to be paid to retiring employees.
Was it a golden age? Or just a mirage?
A combination of factors have changed the final salary landscape forever. Costs are through the roof as interest rates have plummeted, life expectancy has rocketed, accounting rules have changes etc. etc.
Could any of this have been foreseen by the army of professionals who set up and have been running these schemes? Does that even matter?
We are where we are.
Employers have spent the last 20+ years reducing scheme benefits, closing schemes and dumping schemes in the Pension Protection Fund.
Some now seem to be trying bribe employees to leave the scheme by offering unbelievably generous transfer values (we’ve seen up to 48x current pension benefits on offer).
All in all the dye has been cast, the pressure is on and 20 years from now we’ll fondly remember what once was. Or will we?
For now, a great many schemes are struggling, there will be tears before bedtime. Expected pensions will be reduced, there’s no avoiding it.
And a recent study by the Pensions and Lifetime Savings Association (PLSA) has suggested that people who have saved into defined benefit (DB) pension schemes have only a 50/50 chance of receiving the payouts they are expecting, resulting in millions missing out on the retirement income promised to them.
The pressure on some employers to meet their pension obligations has increased significantly, with well-publicised cases of pension collapse including that of BHS once again highlighting the concerns surrounding the future of workplace pensions.
The PLSA looked at the DB pension schemes of 11 million people across the UK.
Whilst most pensions are reliant on successful investment, DB schemes promise a specified level of income during retirement dependent on factors such as the member’s final salary.
The PLSA found that the majority of these schemes had sustainable models to ensure future payments could be made, but also identified three million schemes which might not be able to guarantee the future payments for its members.
However, the PLSA has also suggested pension “superfunds” as a solution, where struggling companies pool their resources together.
The companies would pay a set fee, allowing them to transfer their defined benefit schemes such as final-salary pensions into a wider fund. This would then provide greater investment opportunities for the future.
Whilst a standard deal for members of these schemes means that some could end up with a better final payout than expected, the pension income for others would be reduced as a result.
In response to the PLSA’s findings, the Department for Work and Pension stated: “Most pension schemes are operating well and the vast majority of members can expect to receive their benefits in full.
But in the wake of several high profile cases, there may be more that needs to be done to support the sector.
As we look at options such as the consolidation of pension schemes, we will continue to work with the industry, employers and scheme members to see what more can be done to increase confidence in defined benefit pensions.”
The PLSA’s superfund suggestion has been criticised by some in the pensions sector, suggesting that the body is attempting to undermine the safeguards which have been available for savers since the 2004 Pensions Act.
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