Defined benefit pensions: the current situation
12TH SEPTEMBER 2016
Deficit Reaches £1trillion
The total deficit facing the defined benefit pension schemes has reached £1trillion, their biggest ever funding shortfall. This sum is the gap between the investments that these pension schemes own and the likely eventual cost of the pensions they have already promised to pay.
With five out of six of Britain’s defined benefit pension schemes not having enough money to pay the pensions promised to workers, hundreds of schemes are likely to fold into the Pension Protection Fund.
More Schemes Closing
In 1994, all FTSE 100 companies provided Final Salary Pensions to their employees. Now, there are about half of FTSE 100 companies that still offer any defined benefit savings and even fewer that have schemes which are open to new members.
Ibstock, whose pension was £19.4m in deficit at the end of June this year, recently announced that it proposed to close its scheme for any future accruals.
Royal Mail, which has one of the biggest defined benefit-type plans in the UK, has announced that the scheme is “unaffordable” and could be shut down. The scheme is already closed to new staff, but by closing the scheme altogether it’ll mean that two-thirds of current staff will be forced to switch to a pension which doesn’t provide a guaranteed income.
Radical Government Plans to Reform Defined Benefit Pensions
New government plans to save companies being crippled by growing pension costs could mean pensioners losing nearly a third of their retirement fund.
New measures being considering would mean that for the first time, cash-strapped employers would be allowed to reduce workers’ defined benefit pensions without first going through courts. Under the most drastic option firms would be allowed to reduce annual pension uplifts to as little as zero, shrinking retirement funds by as much as 30% over the course of an average 25-year retirement.
The option is designed to let employers adjust the size annual pension boosts depending on their own financial health. This gives them a breathing space for a short period, after which hopefully things can get back to normal and pension increases recommence.
But fears are mounting that unscrupulous companies could take advantage of the system to cheat employees out of pension increases which are designed to protect their incomes from being eroded by inflation over the years.
‘Safety Valve’ to Cut Pensioner Income
A new controversial proposal to erode the amount paid to pension savers by tying them to a lower rate of inflation, could save large British firms £30bn.
The option being considered by Government is changing minimum annual pension increases, which currently follow the Retail Price Index to track the Consumer Price Index, which tends to rise at a slower rate. The move would reduce pensioners benefits by up to 13% over the course of an average 25-year retirement, data shows.
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