Around 1.7 million of us could be at risk of a cut in our retirement income, as a result of financial pressure on our company’s pension scheme. That’s what Professor David Blake, director of the Pensions Institute at Cass Business School had to say in the Telegraph recently.
He claims that, of the 6,000 defined benefit pension schemes in Britain, of which 10 million of us are members, around 1,000 schemes with as many as 1.7 million members are in a financially unsustainable situation. Some have financially weak companies backing them; others have large deficits; some have both.
If these companies were to go bust, members would be left with a large proportion of their pension at risk. There is a safety net, of sorts, in the shape of the Pension Protection Fund (PPF). In the event that these companies fold, the PFF will take on their obligations and will pay some pension to the holders within the scheme.
However, they only pay out around 90 per cent of the pension’s value, and if the pot is larger than average, losses could be even worse. The overall cap on the compensation the PPF can pay is currently £34,655 a year, so big savers could end up being big losers.
Are you at risk?
It’s not easy to understand what’s happening with your pension fund, nor is it easy to spot if your provider is in trouble. A handful of companies have relatively high-profile deficits, which makes it a little easier, but not all companies are disclosed as being in trouble; at least, not until it’s too late.
Blake suggests watching out for what he calls ‘zombie’ companies backing the schemes. These companies are operated on a shoe string, just about managing to cover pension payments, but not investing in the business itself. Some industries are seen as being more at risk than others, such as companies manufacturing products which have been rendered obsolete by new technology, for instance.
What can you do about it?
If you think your pension is at risk, you can ask the trustees of the scheme to encourage the company to put more funding into the scheme. If this is not possible, the trustees can sometimes arrange a compromise proposal, known as the ‘regulated apportionment agreement’, which spreads the benefit losses across all scheme members more evenly. Everyone gets less, but nobody is left out in the cold.
Of course, you could transfer your pension out of the scheme into a healthier, less risky scheme. However, the amount you’ll end up with is likely to be lower than if you just stuck it out, although this can vary from one scheme member to the next. You are strongly recommended to seek professional financial advice if this is the direction you think you’d like to take.
The most important thing is to find out. If you’re in a defined benefit scheme, do some digging to find out about the level of deficit the scheme is facing, as well as the financial health of the company who is backing it. If these aren’t looking good, then it may well be time to take action. For more support on this issue and to find out your options, talk to Integral Financial Planning and we’ll be happy to help.