50 50 Chance of Getting Your Company Pension.
In a damning report issued by the Pension and Lifetime Savings Association (PLSA), the PLSA has suggested that millions of employees and former employees who are members of defined benefit, final salary or career average salary pension scheme have around a 50% chance of receiving their full benefits at retirement.
In its report, it suggests that “Of the 6,000 schemes in the UK, just over 4,000 are in deficit. Seventy-two percent of the 5,794 schemes which are eligible for PPF protection are in deficit.” (PPF is the Pension Protection Fund – a compensation scheme for company pensions).
Most pension funds are underfunded as you can see above and PLSA analysis categories each scheme being in a position financially to meets its liabilities of:
Of those considered weak, the PLSA suggests that staggering 68% will not meet their liabilities (i.e. 32% will likely recover) and those in the ‘tending to weak’ 52% “have a chance” i.e. might recover to meet their liabilities.
Why is this happening?
Quite simply, these schemes are too expensive. Employees in particular, and of course employers, do not pay enough into these types of pensions to keep them solvent. Investment markets are volatile, meaning returns on the funds both fall and rise but strains on the funds.
Annuity rates (linked to gilt yields and interest rates are extremely low). E.g. If interest rates are 5%, to get an income of £5000 pa, you need to have savings in bank of £100,000. If interest rates are just 1%pa, to get an income of £5,000 pa, you would need to have savings of £500,000! That is the issue with pension funds having to guarantee an income for life but it costing them many times more than it used. They are simply crumbling under ever increasing costs.
The population is also aging meaning that not enough people are paying in now and more are retiring and receiving a pension that they simply did not pay enough in to get (but those were the rules so you can ask no more). Unions take industrial action every time employers try to amend the pension scheme.
Remember BHS? It was the pension fund liabilities that crushed this firm.
Add to this, transfers values (if you wish to transfer your pension away from the defined benefit scheme are high due to low annuity rates) are extremely high, meaning even more money is cascading out of these schemes.
We have even seen proposals from the government to allow schemes to change what benefits they must offer their members. You can guess what that is doing? People are leaving in drives and transferring funds out.
PLSA suggest a SuperFund
Perhaps in a similar model to the Dutch, where different industries/trades have their own superfund for retirement of the members and it is spread across an industry rather than each company, the creation of a UK Superfund could be a solution.
PLSA suggest sharing services with one set of administration functions, pooling investment assets and just one set of governance rules, to offer economies of scale, lower running costs and even the total, full merger consolidation into one ‘super fund’.
Some interest points made in their report and worth consideration. Government/Regulators take note!
Read the PLSA report.