In an earlier blog I commented on the inadequacy of the Pension Protection Fund (PPF), which provides benefits to members of final salary pension schemes where the employers have gone bust. To summarise, the maximum benefits for employees who have not yet reached retirement age, are subject to a cap and are likely to increase both before and after retirement by less than the original scheme. In addition, options such as early retirement are not available under the PPF.
The PPF is funded by a levy on other pension schemes. Unsurprisingly, in these times of recession, an increasing number of schemes are having to call on the PPF because their employers have ceased to trade. In June of this year the PPF announced that levies will remain at the current level, which increases in line with wages. However, the Chief Executive of the PPF, Alan Rubenstein, also indicated that, whilst they are aiming to avoid increases above the level of wage inflation, further rises above this level cannot be ruled out in future, in order to maintain the benefit levels.
Whilst the PPF can demand more from schemes, the question is, can they actually raise the money? Recently a major firm of actuarial consultants has pointed out that, unless the recession ends fairly soon, it may not be possible for the PPF to simply impose increased levies on schemes attached to employers that are already suffering from the economic down turn. If this occurs, the PPF will have little option but to reduce the level of protection it offers to members of final salary pension schemes. Such cuts can be applied not only to the benefits which are not yet in payment but also to benefits already being paid to pensioners.
So what should you do if you have final salary benefits with a current of past employer? (For the avoidance of doubt these are benefits in which your pension is based on your years of service and final salary and are not normally related to investment returns or annuity rates.)
– Order a transfer value and statement of deferred benefits. These will tell you how much the scheme would provide you with were you to transfer elsewhere and also the value of the benefits which you have in the scheme.
– Provide these details to an independent financial adviser, who specialises in pensions, to carry out an initial review (they may need further information, which they can obtain from you or directly from the scheme).
– Obtain a copy of the employer’s accounts to get a view on how solvent they are.
If you are worried about the financial security of an ex-employer, depending on the state of funding of the scheme, there may be a case for moving the transfer value to a scheme under your own control. This is a complex matter requiring specialist professional advice, which I will cover in more detail in a separate post.