Final Salary pension schemes in the UK provide good benefits,
indeed even generous benefits especially for those who spend most
of their working life with the same company. The schemes give an
undertaking that a member will receive in retirement a pension that
is a proportion of their final salary with the company, up to
2/3rds of their salary.
Members often contribute to the schemes but the legal
responsibility for funding that pension undertaking is with the
employer. The trustees of the scheme have to ensure that it is
administered and invested in a manner that benefits all the
Where a company can no longer meet it's obligations to the
pension scheme the fund goes into the Pension Protection Fund
(PPF). This was established under an act of law and is therefore
referred to as a Government backed scheme. In fact, the PPF is paid
for by the remaining final salary schemes paying a levy. The scheme
worked well when there was just a few schemes that went into the
There is now a systemic problem for both the pension schemes and
the PPF. In what is being described as a perfect storm of very low
interest rates, difficult investment conditions, a huge increase in
life expectancy and companies margins being squeezed making
continued contributions to the pension more difficult. Actuaries
forecast that in the worst case the pension funds are nearly
Ł1 TRILLION short.
Action is needed by Government and pension schemes. Some changes
to pensions have already been implemented with surprisingly little
complaint from members. This is because final salary pensions are
complicated and are not understood by their members. As an example,
a recent change to the rate of increase applied to some pensions
from Retail Price Index (RPI) to Consumer Price Index (CPI) means
members lose up to 25% of their lifetime pension.
Withdrawals from the public service pensions such as the
Teacher's Pension Scheme have already been blocked since 5th
April 2015. It is possible that this blocking will be applied to
all final salary schemes as once the members are stuck in the
scheme, reductions can be applied to benefits without the members
voting with their feet.
A significant aspect of the situation with these pensions is
political. The cost of a rescue of these pensions at a Trillion
pounds is three times what it costs to bail out the banks. By
bailing out the banks it saved the whole banking system and was for
the benefit of the whole country. Yet the members of the final
salary pensions represent only 17% of the UK population. If the
pensions went bust it would have a devastating effect on those 17%
of the population but would not affect the other 83%. Is it
politically possible for a UK government to spend three times as
much as the bank bailout to save 17% of the population?
Some other change is required and basically this means a
reduction in pensions for the members of the scheme. Recovery plans
suggested by the Citibank analysts for defined benefit schemes
Selling the pension scheme and
liabilities to an insurance company.
The sponsoring company issue debt
(Corporate Bonds) with the money raised being added to the pension
Allowing employers to have much
longer periods to try to "rescue" the pension through
additional payments to the scheme perhaps allowing up to 30 years
for the rescue.
Allowing pensions and other benefits
paid to members of the scheme to be reduced.
Do you have a final salary pension?
Not all schemes are bad. Some 17% of the schemes are not in
deficit (They currently have enough money to meet their pension
liabilities). Also, to be fair, if investment returns were to get
better the deficits on the other schemes may come down
However, changes are coming as the situation is very difficult.
Once the changes have been put in place members will simply have to
accept lower pensions than they have been promised.
It is possible to do something about this although this will not
necessarily be appropriate for everybody. We strongly recommend
that you have your final salary pension reviewed by suitably
qualified experts as soon as possible to give you an objective view
of your pension prospects before the Pension rules are altered once
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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