DB scaremongering is misleading pension holders
Pension protection is better than reports on recent high-profile company failures would have us believe, says Fiona Tait, technical director, Intelligent Pensions
In financial services we are used to referring to defined benefit (DB) schemes as “gold-plated” and “guaranteed”, so how did we get to a place where so many members of DB schemes are worrying that they will lose their pensions if their employer goes bust?
Some of it is hype. Three significant company failures – BHS, British Steel and now Carillion have received high profile press coverage leading to understandable concerns for their erstwhile workforces. The real problem however is that many DB members do not understand the protections that apply and are therefore vulnerable to suggestions that their pension will be lost along with their jobs.
This is simply not true, at least not in the main. Protection already exists for DB members both before and after a sponsoring employer goes bust. It’s not perfect but most members will receive a significant proportion of their benefits, even if their employer goes out of business and it’s our job to make sure people know this.
Although attention is naturally focussed on what happens after an insolvency event, members should also have confidence that the scheme has been operating properly in the period leading up to it. This is an area which has been under scrutiny in recent years, resulting in a revised DB Code of Practice for DB schemes.
The code does not create legal obligations but is designed to assist trustees and employers to meet the statutory duties that do apply. Compliance with the code will also provide early warning signs of any issues which may affect the scheme’s ability to meet its liabilities, including the ability of the employer to meet its obligations. As part of this the trustees should be made aware of the employer’s business performance, available capital and plans to invest or distribute profits to interested parties.
One of the statutory duties is to require the Scheme Actuary to undertake funding reviews at least every three years and provide members with a funding statement outlining the solvency position to scheme members every year. Should the scheme be deemed to have insufficient assets to meet their future liabilities a recovery plan must be put into place which outlines how the shortfall will be made up within a reasonable period of time.
All of this means that if the scheme is in difficulties the trustees and the employer should act together to address the situation, and if the trustees believe the employer’s actions are inappropriate they should be able to raise their concerns. Great in theory, but difficult in practice if the employer is under pressure or unwilling to listen. These are the cases that require further scrutiny and potentially new legislation.
The Pensions Regulator (tPR) has taken action against Philip Green and Dominic Chappell in the BHS case, and has intervened with British Steel but this was primarily after the insolvencies occurred. They also took action when Carillion’s increasing debts became known but it did not prevent the company continuing to pay executive bonuses. All this shows that Teresa May’s pledge to fine “greedy bosses” and give tPR greater powers of intervention is much needed, sooner rather than later.
On the plus side, it appears at the moment that while most DB schemes are in deficit the funding position overall is improving, and most employers are expected to be able to make up the shortfall where required. The message to members is, don’t assume your scheme is unstable because of the weaknesses of others, check the funding statement and don’t give up valuable benefits without good reason.
Should the worst-case scenario occur and the sponsoring employer is unable to fund the pension scheme debts due to insolvency, the Pension Protection Fund (PPF) takes over. This is often portrayed as a very negative action so members may not be aware of how good the protection is.
Those who are already in receipt of benefits are likely to be the most reliant on their pensions and the most concerned at losing it, so it is important that they are quickly informed they are least likely to be impacted. Providing they are over the normal retirement age (NRA) of the scheme at the point of entering the PPF, they will continue to receive 100% of their entitlement from the PPF.
Members who are under the NRA when the scheme enters the PPF will receive less but are guaranteed to be paid 90% of the entitlement they have already built up. It’s not as good as the original scheme, and it doesn’t cover future accrual, but it is guaranteed by the PPF and inflation-proofed during deferral and (for post 1997 accrual) in payment. I think we could still call that “gold-plated”.