How safe is my company pension?
Forgive me for reminiscing, but I remember the days when if you were a member of a company pension scheme you were set for life, particularly if it was a defined benefit scheme, even more so if you worked for the local authority and a member of the superannuation scheme, be it a teachers scheme, local government scheme, fire service etc.
Back then I worked for the Prudential, which had a non contributory defined benefit staff pension scheme set up on a 1/60th basis. FANTASTIC! I was made redundant in 1999, so what may have happened to my deferred benefits since?
This is the amount in the pot available to keep promises to employees and ex employees when reaching retirement and want to take company pension benefits. When calculating these figures, it is necessary for the Trustees to make certain assumptions about future events. This means that the amount actually needed to provide the benefits – which include those benefits currently granted on a discretionary basis, such as any increase to pensions in payment – could turn out to be quite different from the figures quoted by the company.
Considering this in more detail, most company pension schemes are heavily reliant on ‘new money’ going into the pot – in other words, those who are still working and contributing to the scheme are to a degree funding the income paid to those who are retiring.
Many schemes funding levels have deteriorated over recent years, for a combination of reasons, e.g. poor investment performance (some schemes have still not recovered from stock market falls of 2008), the lack of new contributions going in (due to the closure of the scheme to new employees), mortality rates (retired people are living longer and so there is a bigger drain on the ‘pot’ from which pension income is paid).
SO WHAT DOES THAT MEAN TO MY PENSION?
What many people don’t realise is that they cannot rely on what is quoted in their pension scheme booklet as being the up to date situation of their deferred pension benefits. For example:
At any point prior to retirement, the Trustees can vary the terms of your pension. So the accrual rate can be increased (which means that your pension income is reduced), the retirement date can be changed (so you may have to wait longer to start drawing your pension income), the spouses benefits can be amended (so your spouse may not receive the 50% income you expected in the event of your death), etc.
At any point post retirement, the Trustees can also vary the terms of any annual increases in payment. So you are not necessarily guaranteed increases each year in your pension income once you start drawing it. (Over time, this will impact on the buying power of your pension income due to the effects of inflation).
Unfortunately, there are now a number of pension schemes that are in a situation of being underfunded. See the following chart:
Aggregate funding position of defined benefit occupational pension schemes in the PPF 7800 index, February 2005 to February 2013 – United Kingdom £bn
Source: Pension Protection Fund 7800 Index, end-February 2013.
The information in this chart is not a National Statistic.
Aggregate funding position equals total assets minus total liabilities..
The ‘7800 index’ covers the 6,316 defined benefit occupational pension schemes potentially eligible for entry to the PPF (at February 2013). The number of schemes in the index has declined over time.
Changes made to actuarial assumptions from 31 March 2008 produced a one-off decrease in liabilities of £40.1 billion.
Changes made to actuarial assumptions from 31 October 2009 produced a one-off decrease in liabilities of £71.6 billion.
Changes made to actuarial assumptions from 1 April 2011 produced a one-off decrease in liabilities of £30.6 billion.
The other main components of pension fund expenditure are lump sums payable on retirement, death benefits, transfers to other pension schemes (outward transfers), and administrative costs. Expenditure on lump sums fluctuated around £3 billion from the mid-1990s until 2004, but then rose rapidly, reaching a peak of £8.5 billion in 2010. It then fell back to £7.7 billion in 2012.
The reality is that the average company pension funding levels are currently between 85% and 87% and so the Trustees have two options:
Increase/make one off contributions to the scheme to address the underfunding.
Amend the terms offered within the scheme so that the demand on the pot is reduced moving forward.
WHAT OPTIONS ARE OPEN TO ME IN RESPECT OF MY COMPANY PENSION?
Special care needs to be taken when considering your options in respect of your deferred company pension scheme. To this end, we commission reports from a pension actuary, free of charge, on behalf of our clients in order to ascertain the full picture of a company scheme.
There may well be options open to you that many years ago you would not have needed to consider, e.g.
A transfer to a QROPS can enable your spouse (partner if not married) to continue benefiting from the same level of income as you have enjoyed in the event of your death rather than the reduced spouses pension available from company pension schemes.
The option to take your Pension Commencement Lump Sum (previously known as Tax Free Lump Sum) from as early as age 55 (possibly sooner if you have been outside of the UK for more than 5 tax years). A Company pension scheme will not allow you to take any pension benefits earlier than the scheme normal retirement date (unless you retire on terms of ill health).
The tax payable on income from a QROPS is dramatically less than would be payable on company pension scheme income (typically, a marginal rate of around 3% on a QROPS compared to 24.75% on company pension income as a resident of Andalucia.
Please take a look at our website – www.speedfinancialsolutions.com for further information regarding QROPS and contact us (Tel 951 315 271 or 951 318 529) – we are happy to discuss your own situation in more detail. One of our Advisers will be happy to come and spend some time with you either in your home or at our office to explain and go through your options, so do call to make an appointment.
Andrea Speed Principal Speed Financial Solutions 16 October 2013