How safe is my company pension?

Pension Clinic: Steve Webb addresses concerns relating to those who have final salary company pensions.

If you are receiving a final salary company pension or expect to receive one in the future, high-profile corporate failures such as those of BHS and Carillion serve as a reminder that your pension is only as secure as the company running it.

To be more precise, some of your pension may be at risk if your current or former employer goes bust at a time when there is a shortfall in its pension fund. But how likely is this, what safeguards are in place and what are the pension authorities doing to ensure your pension is safe?

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Deficit concerns

Every year the Pension Protection Fund produces a snapshot of the roughly 5,400 defined benefit pension schemes still operating. There are many different ways of looking at the question of whether a scheme has ‘enough’ money. One way is to compare the money a scheme has with the amount it would cost it to guarantee all its pensions by doing a deal with an insurance company to ‘buy out’ all future payments. On this basis, as at March  2019, just 600 schemes have a surplus, while more than 4,800 have a deficit.

As long as the employer sponsoring your pension is expected to stay in business, you need not worry too much. Current pensions will continue to be paid, and schemes must have plans in place to ensure they will have enough money to honour their pension obligations as they fall due.

That said, it is concerning that these ‘recovery plans’ have not achieved the progress on closing deficits that might have been expected.

For example, the Pensions Regulator recently published an analysis of the plans of about a third of all pension schemes in the UK and the dates when schemes expect to have enough money to meet pension payments as they fall due. Nine years ago, these schemes typically expected to have balanced the books by 2017, six years ago they expected to be sorted by 2019, three years ago they hoped to be in balance by 2022, and now they typically think their deficits will be cleared by 2024. Some progress has been made, but the finishing line keeps moving into the future for many schemes.

What’s more, even if schemes get to the point where they have enough money to meet their ongoing pension obligations, a corporate failure could still leave a scheme unable to guarantee future pension payments. In such a situation, pension scheme members may end up in the Pension Protection Fund (PPF) lifeboat, which is already covering the present and future pensions of more than a quarter of a million people.

Payout haircut

The PPF provides a floor level of benefits, regardless of the funding level of your company pension scheme. For those already beyond their scheme’s normal pension age (typically 60 or 65), the PPF will generally continue to honour the pension they currently receive, although future increases for inflation may be lower. For those yet to reach pension age, a 10% ‘haircut’ will applied to their pensions, while further cuts will be made for those with the largest pensions.

Part of the job of the Pensions Regulator is to reduce the risk of schemes ending up in the PPF in the first place, and in March 2020 it published a consultation on tougher rules on pension scheme funding. The main measures include an expectation that schemes should clear their deficits faster than they currently are, and greater pressure on employers to prioritise tackling their pension deficits over alternative uses for free cash, such as paying dividends.

These changes will not be implemented until late 2021, at the earliest, but if they are successful, they should increase the likelihood that companies’ pension promises will be kept.

Is my pension covered by the Pension Protection Fund?

The vast majority of defined benefit pension arrangements in the UK are covered by the Pension Protection Fund. The sponsoring employer pays an annual ‘levy’ to the PPF, and in return company pension scheme members receive PPF benefits if the firm goes bust. Not every scheme is covered, however, as the recent Flybe bankruptcy has made plain.

The company was based in the Isle of Man, so its employees’ pensions are not covered by the PPF. If you are unsure where you stand, ask your scheme if your benefits are covered by the PPF.

Steve Webb is a partner at pensions consultancy Lane Clark & Peacock.