How Safe Is Your Final Salary Pension?

Services provider Carillion has found itself joining the likes of Toys ‘R’ Us and BHS, in becoming the latest company to self-destruct. Leaving a devastating effect on defined benefit (DB) pension savers. The Carillion disaster happened just as the Pension Protection Fund (PPF) reported that roughly two-thirds of the DB pension schemes in operation in the UK are in deficit.

A DB or final salary pension scheme pays a retirement income calculated as either a percentage of an employee’s final salary or an average of the income they earned during their employment. DB schemes have, for the most part, been replaced with Defined Contribution (DC) schemes. While previously seen as less valuable, DC schemes are fully protected if an employer goes bankrupt as the savings are held in your name rather than by the company.

When Carillion filed for compulsory liquidation on the 15th January 2018, its DB pension schemes had a reported deficit of £587m. The PPF is taking over the management of the scheme, which has 28,000 UK members. Of these, 12,000 are already claiming their pension and will be fully protected. However, those who are not yet drawing their pension will only get up to 90% of what their pension is worth subject to a cap when they retire. In both cases, inflation increases will be capped at 2.5% a year.

If you are a member of a DB pension scheme, we recommend that you review it on a regular basis. This is likely to include looking at the scheme’s accounts, investment report and the number of scheme members who are entitled to its benefits. If a DB pension scheme is in deficit its trustees must submit a recovery plan to return it to full funding with the Pension Regulator.

Many people are now looking into alternative arrangements to provide increased flexibility and take control of their retirement planning.  If you would like to discuss this matter please do not hesitate to contact a member of the Foresight team on 0161 026 9350.