Advisers: How safe are your pensions?

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For adviser use only

 

If there’s one thing the last year has reminded us of, it’s that life isn’t always predictable. 2016 was certainly a year of surprises, and the first four months of 2017 have been no different. In some walks of life, many of us hope for the best and expect the worst. But, when it comes to retirement savings – be it our own or client investments - should our attitude really be the same?

The past year’s events have unfortunately heightened fears regarding the ‘security’ of our pensions. With the BHS pensions debacle hitting the headlines, with Tata Steel UK agreeing to cuts in pensions to secure jobs, and ongoing debate about state pensions, you’d forgive your clients for thinking that their pension might simply not be there when they reach retirement. 

But how substantiated is the fear that pension money isn’t safe? The key point is that not all pensions are created equally, and therefore, are protected in a variety of ways. The good news is that, in many cases, you and your clients may have more security than you realise.

Pensions – how much and where?

Pensions is a big issue in the UK, with around US$2,868 (£2,299 billion in April 2017) invested in various pension funds, according to the Willis Towers Watson Global Pensions Asset Study 2017*. That is a huge number, so to put it in perspective, that’s the equivalent of almost 20 years of NHS funding based upon 2015/16 levels. 

Most of this is invested in occupational pension funds with 82% in old style ‘gilt-edged’ final salary or defined benefit (DB) schemes, according to the Willis Towers Watson study. 

’Gold plated’ pension schemes were recently brought to our attention with the collapse of BHS, however, well before BHS made the headlines, their ‘gilt’ was looking decidedly tarnished. It’s for this reason that government has launched a consultation into how to make them more sustainable – albeit with a possible hit to inflation protection of member benefits.

The remainder of the pension market is held in defined contribution (DC), or money purchase schemes. For these, while the main concern in previous years was the investment return, in today’s market, an equally big question for many is, who is protecting pensions?

From a security perspective, the issues are very different between DB and DC. There are also big differences in standalone schemes or those managed through a regulated pension provider. In the latter case, scheme assets are held separately from the employer so benefits built up to date are unaffected by the collapse of a company.

So what protections are there?

Long before recent events, the government and regulators have been putting in place measures to protect members of DB schemes.

Since 2005, the Pension Protection Fund (PPF) has provided a safety net for final salary pension members whose employer goes bust. It levies a charge on all DB schemes and takes over the pension schemes orphaned by failed businesses and has built up £26 billion of assets which are invested to meet future pension entitlements of members.

Despite certain limitations on the benefits it pays out, for example limiting payments to those not yet retired to 90% of entitlements subject to a further monetary limit, the PPF offers a strong reassurance that if your employer goes under, you won't kiss goodbye to all of your pension plans as well.

For DB schemes winding up before April 2005, there is also the protection of the Financial Assistance Scheme.

Protections within regulations?

Long before recent events, the government and regulators were putting in place measures to protect members of DB schemes.

Since 2005, the Pension Protection Fund (PPF) has provided a safety net for final salary pension members whose employer goes bust. It levies a charge on all DB schemes and takes over the pension schemes orphaned by failed businesses and has built up £26 billion of assets which are invested to meet future pension entitlements of members.

Despite certain limitations on the benefits it pays out, for example limiting payments to those not yet retired to 90% of entitlements subject to a further monetary limit, the PPF offers a strong reassurance that if an employer goes under, scheme members won't kiss goodbye to all of their pension savings as well.

From April 2017, the cap goes to £38,505 at NRD 65, therefore 90% max for those before NRD (or who have early retired) will be £34,655 at NRD 65 (actuarially scaled back if scheme NRD<65). An extra cap is being introduced from April 2017 for those who have over 20yrs service AND have been subject to cap giving an extra 3% extra per annum above 20yrs up to max of 2 x standard cap.

For DB schemes winding up before April 2005, there is also the protection of the Financial Assistance Scheme.

Peace of mind

While there have been some very unfortunate incidents making the pensions headlines recently, it’s important to feel reassured that pensions are more secure than media headlines sometimes suggest. Whether DB or DC – and particularly if your scheme is protected by a regulated pension provider – you can take some confidence that there are a range of protections for your client pension offerings are in place. The riskiest approach for client’s retirement saving would certainly be to rely solely on the state pension and opt out of workplace schemes available.


 * Figures are converted back from dollars at a June 2016 exchange level to avoid distortion from the volatility that followed the Brexit and Trump election outcomes.

 

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