Take greater control of your pensions destiny
When I embarked upon a career in financial journalism 30 years ago, I was told by my ogre of an editor that our splendid country had one of the best occupational pension systems in the Western world.
We led the universe in pensions, I was informed, and I should be honoured to write about such a British success story. I was – for a while.
If I were starting in financial journalism today, we would not be having the same conversation. More likely, it would go: “Mr Prestridge, company pensions are in a monumental mess. Go out and dig the dirt for there is much to be found.”
Back in the mid-1980s, pension schemes in the private sector were in many ways (not all) ‘best’ in club, primarily because they were defined benefit based. You worked hard, sacrificed a little take home pay and you sailed off into retirement with a guaranteed pension linked to your final salary.
Sadly, this pensions utopia has long disappeared.The company pension landscape has changed beyond recognition – and not for the better. Undermined by a mix of government meddling, daft rules, lax regulation and company penny- pinching, defined benefit pension schemes are now struggling for survival. Most have little chance of honouring the pensions they have promised existing or former workers.
Most don’t have enough assets in their tank to meet all their liabilities (pensions promised to the likes of me and you) and never will have – irrespective of whatever pressures are put upon the sponsoring employers by The Pensions Regulator to shore up their pension black holes. The future looks bleak. For every defined benefit company pension scheme in surplus, there are nearly five in deficit. Collectively, schemes have deficits not far short of £300 billion.
However, there are a few pension comforts out there. Since 2005, a safety net has existed in the form of the Pension Protection Fund (PPF) to protect workers with defined benefit pensions. It kicks in when an employer goes bust, leaving in place a pension scheme without the resources to meet all its demands.
Without it, some 119,000 people would not be receiving the payments (pensions) they currently do while an additional 100,000 would not have the assurance that they will be able to rely upon the PPF to pay them their pension – 90% of it.
Also, we now have The Pensions Regulator in situ to ensure fair play between companies and scheme members.
Yet these ‘comforts’ have serious flaws.The PPF is principally funded by a levy on remaining defined benefit schemes – a cost to add to the many of running such pension arrangements. As these schemes diminish in number, more costs are dumped on them, jeopardising their future.
The PPF’s existence, perpetuated by a weak regulator, has also encouraged some companies to run up huge pension deficits in the expectation that they will be able to dump them on the PPF. This seems to be what has happened at failed retailer BHS, where a company pension scheme has been left with a whopping £571 million deficit. Responsibility for the pensions promised under this scheme will now transfer to the PPF.
So what should you do if you are due at some stage a pension under a defined benefit arrangement from a current or former employer? Stick in the hope all will work out well, or twist?
Thirty years ago, my editor would have said stick. But today, that advice no longer holds good.
At the very least, you should speak to a financial adviser qualified in all pension matters who can assess the pros and cons.
New rules introduced last year now give you far greater control over the pension rights you have amassed, including the option to transfer out of a defined benefit scheme to access more flexible retirement options available through an alternative defined contribution pot. By transferring, you can take far greater control of your pensions destiny – for example, taking income when you need it and investing the money the way you want it to be.
Experts at pension consultant Willis Towers Watson say one in five members of defined benefit schemes who has taken financial advice under the new rules has moved their money elsewhere. In an imperfect pensions world, it’s a route worth considering.
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.