Law firm to challenge pension scheme restructuring
A London law firm is challenging the restructuring of a final salary pension scheme to protect the interests of its members and prevent the deal setting a precedent for other struggling schemes.
The 3,300 members of the Halcrow Pension Scheme have been offered the choice of transferring onto a new employee sponsored scheme which will pay a fixed income for life (so with inflation-linking removed) or being transferred into the Pension Protection Fund.
Halcrow is an engineering consultancy that has been involved in high profile projects including the Channel Tunnel, HS1 and Second Servern Bridge. In 2011 it was acquired by the American infrastructure company, CH2M Hill. By the end of 2014 it had pension liabilities worth £758m, but only £500m in assets, leaving a deficit of £258m.
In restructuring the scheme in this way, the trustees are invoking Regulated Apportionment Arrangements (RAA) – a statutory mechanism that allows schemes to free themselves from their financial commitments to members in order to avoid insolvency.
However, Irwin Mitchell, the law firm challenging the proposed deal is concerned that if it goes ahead it would set a precedent for the 80% of schemes that are underfunded.
- Read our article How safe is your ‘gold-plated’ final salary pension?
Commenting on the challenge, Martin Jenkins, pensions partner at Irwin Mitchell, says: “The key point about this is that scheme members have been provided with very little of the information about the scheme finances to which they are entitled, and no opportunity for consultation. What is needed is sufficient time and resources to make a thorough and independent review that takes into account the degree of integration between Halcrow and its American parent.”
He adds: “The Halcrow Pensioners’ Association (HPA) also believes that the Pensions Regulator has not been given full and accurate information and that the Regulator issued the RAA because of the threat by CH2M to force Halcrow into immediate insolvency, with the loss of thousands of jobs. However, the Association does not believe that this threat is credible.”
This legal comes as new data from the Pension Protection Fund reveals that UK pension liabilities have increased to a new high of £1,747 billion. Their collective deficit has also increased to £383.6 billion – an increase of £89 billion since the end of May.
These increases have been blamed on plunging gilt yields, which have fallen in the wake of the decision to leave the EU.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: “The UK’s gold-plated pension system is starting to look tarnished. Deficits are soaring, employers are reneging on their promises and still more money is needed. Companies are having to divert profits into schemes to make good on their promises, which means less investment capital to help businesses grow and less money available to invest in the pensions of younger workers.
Accrued pension rights have to be respected and investors have to be able to trust the system. However, there is also a growing argument for the Government to look at finding a more balanced approach to the retirement funding needs of UK workforce.”
If you’re worried about a final salary pension scheme then you should take independent financial advice. Read our articles on How to find a financial adviser in 2016 and How much should I pay for independent financial advice?
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.