The Pension Protection Fund (PPF) is predicting a tough year ahead for already beleaguered final salary pension schemes (1).
The data released by the PPF (2) analyses the current situations of defined benefit (DB) pension schemes in the UK. These final salary schemes normally offer their members an income in retirement based on a proportion of their ‘final salary’ and are traditionally a much valued employee benefit.
DB schemes can however be extremely expensive for firms to run with people are living for longer and firms, rather than employees, bear the risks that investments may not perform as well as hoped. As a result many final salary pensions have either been closed to new members, or to all members, over recent years, although they are still offered by some large employers (3).
Part of the PPF role is to act as a lifeboat to members of DB schemes where the firm offering the final salary scheme has gone bust and the scheme can no longer afford to pay the promised pension. In these situations the PFF provides financial compensation to the schemes members.
Andrew McKinnon, CFO of the PPF commented on the recent analysis of DB schemes (2). He said that while scheme funding has remained largely stable in the year to March “there have been large swings in funding since June. When we look back at what progress schemes have made over the last decade it appears that many schemes are just treading water.”
Mr McKinnon continued: “The current economic backdrop, as well as scrutiny faced by the entire industry, suggests conditions will remain tough in 2017.”The figures showed that the deficit of 5,794 DB pension schemes totalled £221.7 billion at the end of March 2016.
Tom McPhail from Hargreaves Lansdown said (2): “The relationship between employers and the UK pension system has changed significantly in the past 10 years Pension schemes used to be owners of UK companies as well as being funded by them. Now, the bulk of scheme assets are invested overseas or in bonds.”
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.