How safe is your company pension?

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One of the defining memories of 2016 was the sight of Sir Philip Green giving evidence to a parliamentary select committee about the collapse of BHS and the threat to its pension scheme.

The news was also dominated by the story of Tata Steel and the risk that if the company went bust, the jobs and pensions of thousands of steel workers could be on the line. But how typical are these examples, and should you be worried if you are receiving, or will receive, a company pension?

Let me start with two pieces of good news.

First, according to the Pensions Regulator, the vast majority of company pension schemes are expected to pay their pension liabilities in full.

THE GOOD NEWS

Despite the challenges caused by record low interest rates and economic turbulence, around one quarter of all schemes are currently running a surplus. Of the remainder, the vast majority have a credible 'recovery plan' in place to deal with any deficit over a period of years.

Second, even if the worst happens and the company becomes insolvent when there is a shortfall in the pension fund, there is a comprehensive safety net called the Pension Protection Fund (PPF).

If your scheme goes into the PPF, you will get 100 per cent of your pension if you are over scheme pension age, and 90 per cent if you are under.

It is true that the annual upratings you get thereafter may well be lower than the upratings you would have got if your scheme had continued, but the PPF does provide a good deal of peace of mind.

But there is still a problem to be solved with regard to 'defined benefit' (DB) schemes, which make a pension promise based on how much you used to earn and how long you worked for the firm.

Some schemes are in such a bad way that they may never meet their pension promises. Such schemes are known technically as 'stressed' schemes or more informally as 'zombie' schemes.

Estimates vary as to how many schemes are in this situation, but there is a strong case for the Pensions Regulator to be more open with scheme members if their scheme is in this situation.

Because of the BHS experience and the wider issues around DB schemes, the Work and Pensions Select Committee undertook an extensive inquiry and has just published its recommendations.

These are designed to feed into the government's thinking, ahead of its own Green Paper to be published early in 2017.

NUCLEAR DETERRENT

One of the most headline-grabbing recommendations of the Select Committee is what it calls a 'nuclear deterrent', aimed at employers who do not take their pension responsibilities seriously.

The suggestion is that where an employer is found to have evaded paying money into a pension, they should be required to pay three times as much.

The Committee's view is that this is a power that 'need never be used', but that it would focus the mind of employers who were minded to neglect their pension scheme.

Some of the Committee's other recommendations are less eye-catching but no less important. They suggest that trustees should be able to look at changing the rules of the scheme with regard to things like inflation protection, if this is what it takes to keep the scheme going.

One idea, building on a practice common in some other countries, is that indexation could be reduced or suspended in tough times but restored in good times.

Changes like this are seen as an alternative to letting the scheme end up in the PPF where the reduction in benefits, particularly for those of working age, could be greater.

The Committee also wants to see more 'consolidation' of small schemes. Around one third of all DB pension schemes have fewer than 100 members and are generally relatively expensive to run.

Although some are excellent and run by expert and committed trustees, too many struggle and would benefit from being part of something bigger. The theme of consolidation has come through strongly from pensions trade bodies and is likely to feature in the government's Green Paper as well.

It remains the case that the vast majority of people with a DB company pension can be confident of getting the pension they were promised.

But much still needs to be done to make sure that the headlines of 2017 are not once more dominated by stories of workers worried about their pensions.


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