The Great British Pension Problem, have you heard of it? Do you really know if it will affect you? Surprisingly it is not in the news as much as I think it should be and well to be honest it’s not just a problem, it is more of a disaster.
Due to the magnitude of this problem, some of Britain’s biggest companies are actually thinking about going bust over it. The amount they owe their former and current employees through the pension schemes is in some cases worth more than 20% of the company’s market value. The knock-on effect has therefore been for much of the growth going into boosting these funds and not developing the business or investor returns.
Despite £35 billion being ploughed into the pension funds of these FTSE350-listed companies over the past 3 years, just £4 billion has been wiped off the deficits.
Defined Benefit Schemes pay a guaranteed amount for life. But the nature of these pension schemes has made it impossible for the firms to know exactly how much they will have to end up paying out. Calculating a pension deficit involves considering several factors, like pension benefit guarantees made to past and present employees, how long they live to draw the benefits and the investment returns. Regardless of performance of investments and contributions to top up the fund by current workers, any deficit has to be made by the employer.
This problem has led to many companies deciding to no longer offer Defined Benefit Schemes to new employees. However, the companies still need to continue to fund the scheme until the youngest member dies. New employees can instead expect a pension based on income from an annuity they buy with their accumulated retirement savings (Money Purchase Pension).
Average contributions for Money Purchase Schemes are around 9% of a worker’s salary, compared with 19% under a Defined Benefits Scheme. The money that employers are still contributing to Defined Benefit Schemes is limiting the amount that employers are contributing to Money Purchase Schemes, which reduces the investment potential and leaves the employee with a smaller pot to fund an annuity when they retire.
Are you in a defined benefit scheme and don’t know where you currently stand? Please contact me for a free pension consultation and we can make sure your future is safe.
I hope that you have enjoyed reading this post.
CEO
Kuala Lumpur : Malaysia
Stuart Yeomans 