The pension deficit disaster – will it affect you?
Written by Carl Turner on March 29, 2017.
The recent high profile case of BHS going bust leaving 20,000 ex-employees as well as 11,000 current employees wondering what would become of their defined benefit pensions could be the start of a tidal wave of similar cases if recent estimates by experts are anything to go by. The figures are both shocking and frightening:
• Total deficit of defined benefit pension funds as of December 2016: £560bn
• £90bn increase in deficit in 2016
• Pension funding deficit is almost one third of UK’s total GDP
• 5,000 UK companies with pension deficits
When a former Pensions Minister (in this case, Steve Webb) says there are ‘many hundreds of ‘zombie schemes’ in the UK that have ‘no realistic chance of the pensions promises being met’, it’s deeply concerning for anyone basing their retirement plans on pensions they are expecting to receive from a defined benefit scheme.
There are a number of factors which have converged to worsen the pension deficit including slashed interest rates, the collapse of gilts, poor regulation and increased life expectancy. This toxic cocktail means that the issue can no longer be swept under the table – solutions need to be found. Possible solutions include:
- Retirees taking a hit and receiving a smaller pension than they were promised
- Governments and companies increasing borrowing to cover the deficit, which will push up the level of national debt
- ‘Plasma-TV deals’ whereby companies buy out members of schemes at risk with lump sum deals which will leave retirees worse off
- A rise in interest rates which would increase investment returns
- Shareholders accepting reduced dividend payments
Any of these solutions will of course have both winners and losers and debate is likely to be fierce in the coming years on these issues.
Those who have BHS pensions are protected by the Pension Protection Fund. Set up in 2005 the fund is a government-run scheme which collects a levy from all companies with defined-benefit pension schemes to rescue the pensions of those which go bust, albeit with a complex capping system. However there are question marks over the PPF’s ability to adequately compensate retirees if a tidal wave of firms go belly up.
The role call of UK companies facing difficulties includes big hitters such as BT, the BBC, G4S, BAE Systems and Barclays. This leaves a huge number of people needing to re-evaluate their retirement planning and possibly make contingency plans in case of future bankruptcies which could devalue their pensions significantly.
If you are concerned about how the pension deficit could affect your retirement, now is the time to act. Why not contact me for a free assessment and analysis of the steps you can take now to safeguard your financial future?