Companies are looking for solutions to plugging their £459 billion pension black holes, but whatever way they decide to go, retirement savers will lose.
Direct benefit or final salary pension schemes offer savers a guaranteed pension rising in line with the cost of living for life.
The trouble is these pensions have become too expensive for employers due to record low interest rates and miserable bond returns.
As a result, companies are looking for ways to reduce their liability to workers, but whichever way they turn, the deal is good for them and not so good for workers.
Options employers would like
The options are all unpalatable for retirement savers:
- Zombie companies that soldier on making just enough money to fund their pensions
- Companies ignoring their pension deficits in the hope that the economy will change and higher interest rates and bond yields will see their pension liabilities fall
- Switching the cost of living index from the retail price index (RPI) to the consumer price index (CPI), which gives a lower rate of inflation
- Allow companies to pay a statutory minimum defined by the government into pensions
- Let companies stop paying into pensions until their finances improve to a point where they can resume
Financial experts have worked out that if a company pension is taken over by the government’s Pension Protection Fund, the average retirement saver loses £45,000 of benefits.
Although all the solutions mean retirement savers lose money, the experts claim the loss is not as much as going into protection.
For example, switching from RPI to CPI is estimated to cost the average worker £20,000.
Balancing pension rights
The problem for the government and regulators is balancing protecting pension rights against the survival of a business.
The options for many are moving the cash to a self-invested personal pension (SIPP) or a Qualifying Recognised Overseas Pension Scheme (QROPS).
SIPPS are DIY managed pensions in the UK, while QROPS are similar pensions for British expats.
Suddenly financial advice to keep invested in a final salary pension seems less sensible after the British Home Stores debacle where the firm folded with a £571 million pension deficit.
Only 29 of the FTSE100 firms has a fully funded workplace pension, with the rest at risk of paying reduced benefits in the future.