Final salary pension scheme deficits become increasingly worrisome
1000 Final Salary Pension Schemes Face Going Bust
A new report highlighted in a recent FT article from the Pensions Institute, part of Cass Business School, has shown up to 1,000 defined benefit schemes are at ‘serious’ risk of falling into the Pension Protection Fund.
The report, ‘The Greatest Good for the Greatest Number’, predicts that the businesses of hundreds of employers will become insolvent well before the end of their recovery plans, under which the trustees and sponsor agree contributions to make good the deficit over an agreed number of years.
It shows that on insolvency, these schemes may have insufficient funds to pay members’ pensions in full.
Of the 1,000 defined benefit schemes at ‘serious’ risk of falling into the Pension Protection Fund, 600 schemes may only receive PPF compensation, and many sponsors are expected to become insolvent in the next five to 10 years.
Additionally, the remaining 400 sponsoring employers might initially survive, but may eventually fail if they are not able to off-load their pension obligations.
The argument in the report is the worst case scenario of insolvency can be averted if the approach to managing pensions changes to one that is prepared for many more schemes to pay less than full benefits on a planned and co-ordinated basis, with all parties in agreement on how best this is achieved.
The Pensions Institute stated freeing an employer from the burden of its pension fund whilst avoiding insolvency, can create extra value which can be shared with the members to achieve a better outcome.
David Blake, professor of pension economics at Cass Business School, said “In aggregate the schemes have liabilities of £225bn, assets of only £180bn and therefore deficit of £45bn.
“If this situation is not urgently addressed, business which may be saved will be lost to the UK economy and those members will end up receiving PPF compensation.”
“Government policy is predicated on the assumption that employers with DB schemes, over time, will be strong and prosperous enough to pay benefits in full.
“The report challenges this rose-tinted view and seeks answers to the following question: What actions should trustees take, to secure the best possible outcomes for the members they serve, if the employer is not strong, is unlikely to prosper, and, the prospect of the Pension Protection Fund ‘lifeboat’ looms?”
He added that in reality, many trustees are trying to manage significant conflicts of interest.
Additionally, Mr Blake said there was a collective silence amongst trustees.
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