We all recall last year’s demise of BHS and its failure to protect the company pension scheme. Frequent news headlines report huge numbers where future pension liabilities exceed assets, and estimates of overall underfunded final salary (defined benefit, or DB) schemes are at 80 percent.
Years of low interest rates and increasing lifetimes have made it difficult for pension investment trustees and their actuaries to ensure that there’s enough in the pot to make good on pension promises. DB schemes were originally designed for folks living 10 years into retirement – not 30.
It’s no wonder we worry about the ability of our companies to still be around when it comes time to draw our pensions. And if a company goes bust, we have the PPF (Pension Protection Fund) in the UK, although there are limitations on that as well.
So your DB pension scheme’s not in deficit, life’s good? Not necessarily.
While many DB schemes (including all of the FTSE 100) have been closed to new employees for years, the cost of providing for existing members is still there and growing. Increasingly, even well funded schemes are at this and concluding that changes must be made.
Marks & Spencer closed its scheme to new accruals from March 2017. No additional benefits will continue to accrue to existing members – they’ll still get their pension, but future work won’t count. Royal Mail made a similar announcement earlier this year, one that is likely to lead to a postal strike in the UK very soon. A company does not have to be in a situation like Tata Steel where the choice is closing the pension fund or closing the company.
34% of the FTSE 100 schemes are now closed to future accruals and the number is likely to rise. Some companies are rewriting other aspects of their schemes, such as making a “final salary” now a “career average earnings”.
There are a number of reasons for the large number of people transferring their pensions out of their company’s plan. High transfer values (the multiple of an annual pension), wanting to take control of probably one’s largest asset and underfunding concerns may all play a part. Considering a transfer out is a big decision and needs professional advice. But uncertainty about changes to even strong plans is now adding another consideration to that decision.
Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC