Rules relaxed for defined benefit pension schemes
The Pensions Regulator has advised more than 2,000 company pension schemes that certain rules may be relaxed to help them plug their deficits during the difficult market conditions.
In its annual funding statement sent out to around 2,145 defined benefit schemes today, the regulator said pension schemes struggling to lower their deficits may be allowed to reduce them over a longer period.
It also said that contributions to the pension plans by the employer should sometimes take priority over paying shareholder dividends.
The guidance comes after calls for the regulator to allow schemes to make an allowance for low gilt yields and the effect of quantitative easing in the assumptions that they use.
Addressing these calls, the statement said: "The regulator does not believe this is a prudent approach as it seeks to second guess future conditions. However, we will consider additional flexibility in recovery plans where employers are genuinely struggling to support their scheme."
Since 2008, gilt yields have fallen by more than 2.5%, which causes a rise in liabilities for pension schemes because most of them are heavily invested in gilts.
The fall in gilt yields has largely been caused by the £325 billion that has been pumped into the UK economy via quantitative easing.
Dr Ros Altmann, director-general of Saga, says quantitative easing has put defined benefit schemes in a very difficult position. She says that the regulator has had to "tread a fine line between, on the one hand, allowing employers too much leeway to ignore worsening funding positions and, on the other hand, forcing them to fill their pension holes too quickly, thereby undermining the sponsoring company itself".
While the regulator said that in some cases pension contributions should be made rather than dividends, it also said that capital expenditure, paying other debts and making dividend payments was important too as it encourages investment in a "healthy, sponsoring employer".
Ultimately, if an employer becomes insolvent and there are insufficient assets in the scheme to pay out the pensions, the scheme will move into the Pension Protection Fund.
For pensioners already drawing their pension out of the scheme, the PPF generally continues to pay out the same level of pension. For members that have yet to retire, the PPF pays 90% of the pension, subject to a cap of £30,644 per year.
Many companies have closed their defined benefit schemes over the past decade, as costs relating to the schemes spiral. Ford, which employs 15,000 staff in the UK, is one of the most recent companies to plan to close its scheme to new employees. The Unite trade union said on Wednesday that it would ballot Ford UK members about striking over the pension changes.
This article was taken from our sister website, Money Observer.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.