I only ask because things have changed quite dramatically recently. In fact, according to PwC, the combined deficit of defined benefit pension funds in the UK is currently standing at a whopping £460bn.
It doesn’t seem to be calming down either, with PwC chief actuary Steven Dicker stating:
“The deficit calculation is based on a ‘gilts+’ approach and is sensitive to even modest market movements. Compounding with the uncertain economic and political climate, the deficits calculated on this basis are likely to remain volatile.”
According to their firm’s Skyval index (which tracks 5,800 DB pension funds), in July and August this year we saw a continued increase in the deficits by a further £40bn.
As always, politics has a role to play
Skyval also tracked the impact of political events and policy decisions on DB deficits in 2016. Unsurprisingly the Brexit vote had the biggest short-term impact on DB pension deficits in 2016 and has an £80bn increase from 23 June to 24 June attributed to it.
PwC’s global pensions head Raj Mody predicts that 2017 will see pension fund trustees and sponsors having to reach much more informed conclusions about how to tackle their pension deficit and to put robust strategies in place.
Mody goes onto suggest “Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. DB pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information.”
Time for a plan!
Schemes affected by the deficit have to have a recovery plan in action. So it might be worth looking into what your scheme has mapped out in terms of a action.
What if your sponsoring employer goes bust?
If the sponsoring employer goes bust, the scheme will automatically go into the Pension Protection Fund (PPF).
Unfortunately the likelihood of a sponsoring employer going bust is on the increase, with big names like BHS famously included on the growing list.
Not only that, but with Brexit just around the corner, you can pretty much guarantee that economic uncertainty is here for a while longer.
So what will the PPF do to protect your current pension?
If you’ve already retired, the good news is that things shouldn’t change much at all. If you were over the scheme’s normal retirement age when your employer went bust, the PPF usually pays the full 100% level of compensation.
If you retired early, and you did so before you reached your scheme’s normal pension age (before your employer went bust), then the PPF usually pays up to a 90% level of compensation. However the compensation is capped. The cap at age 65 is, from 1 April 2017, £38,505.61 (this equates to £34,655.05 when the 90 per cent level is applied) per year. With this cap being set by DWP.
There is also a Long Service Cap for members who have 21 or more years’ service in their scheme. Which increases the cap by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
If you haven’t retired just yet, when you do reach your scheme’s normal retirement age, the PPF should pay compensation based on a 90% level subject to a cap, as described above.
So who’s most affected by this?
The very simple answer is, that this immediately affects people on high salaries who are approaching retirement.
Which is why it’s important that you have a good understanding of what the impact of this deficit might have on your retirement. That way you will be aware of any difference to what you expected to receive from your pension and can plan accordingly.
Finally, the most important question… what can YOU do about this today?
If your scheme is showing increased deficits, combined with higher transfer values, then now is an opportune time to carry out a full review. Especially as things may have dramatically changed since you started on the scheme and your expectations may no longer be on course to be achieved and delivered.