New analysis shows more than 500 firms could be holding off on payments to Direct Benefit pension schemes
Hundreds of firms are delaying payments into staff pension funds because of the coronavirus pandemic.
More than 500 companies are likely to stop tackling the deficit in their Defined Benefit (DB) pension schemes, according to new analysis by pension consultants Lane Clark & Peacock (LCP).
The consultants say the total amount of contributions deferred is likely to be worth around half a billion pounds.
Many of the UK's leading companies already had large pension fund deficits before the coronavirus outbreak hit, and are having even more difficulty now.
The Pensions Regulator (TPR) has allowed employers to delay making contributions to DB schemes if the firm faces serious economic challenges because of the coronavirus pandemic.
This is subject to certain safeguards, including cutting back on dividends and bonuses.
Firms which have already said they are planning to hold off on payments include Debenhams and Philip Green’s Arcadia Group, which owns brands including Top Shop and Dorothy Perkins.
Jill Ampleford, partner at LCP, says: “Some firms that are fundamentally sound are nonetheless facing huge short-term cashflow pressures during the present crisis. The ability to agree with trustees a delay in making pension contributions will help them to weather the present storm and continue their support to the scheme in the long-term.
“But it will be vital to get things back on track once the crisis is over so that a realistic plan is put in place to deal with the shortfall in the pension scheme, particularly as this could have materially increased due to changes in financial markets.”
As at 31 March 2019, the Pension Protection Fund indicated that there were 5,436 live defined benefit pension schemes in the private sector.
The Office for National Statistics says employers pay around £5.5 billion into DB pension schemes during a typical quarter, with most of this used to clear deficits.
LCP says that if 10% of schemes see a delay, this would suggest around half a billion pounds will be held back.
What is a Defined Benefit pension scheme?
DB pension schemes – sometimes called a final salary scheme - pay out a guaranteed income for life.
The amount they pay is linked to the number of years the recipient worked for a particular employer or the amount they earned.
DB contribution schemes are now uncommon and have generally been replaced by Defined Contribution (DC) schemes.
DC pensions build up a pot with contributions from you and your employer which are then invested to give you a return when you retire.
The income you might get from a DC scheme depends on the amount you pay in, the fund’s investment performance and the choices you make at retirement.
Is your pension safe in a Defined Benefit scheme?
The good news for people with a DB scheme is that they are protected by the safety net of the Pension Protection Fund (PPF) if the company they work for collapses.
When a firm goes bust the PPF steps in to protect the pensions of employees. The assessment process usually lasts between 12 to 24 months.
Those who are officially retired or who have passed the retirement age will continue to receive their pension payment in full.
However, those who are not retired or retired early will lose around 10% of their pension and will also be subject to an annual cap set by the government.
This is currently £40,020 for those aged over 65 and £36,018 for those who have not retired yet.