However, a recent claim by Alan Rubenstein, head of the Pensions Protection Fund (PPF), a government agency set up to help failing pension schemes, may have indicated that some final salary schemes are now potentially unattractive. Mr Rubenstein claimed that five out of every six final salary schemes were underfunded and may struggle to pay their members the full pension they were expecting.
Speaking to The Telegraph, Mr Rubenstein said:
“It is misleading to allow people to expect promised pensions when, in fact, there is only money enough to pay about 60% of those pensions [should they be cashed in today] and where nothing is being done about the shortfall.”
For those currently in their forties and fifties, or those who are expecting fairly wealthy final salary pensions, the risks of not receiving the expected funds is increased. This is because the pensions of those who have already retired is protected first, placing those approaching retirement at greater risk, whilst the annual payout per person if a pension is taken over by the PPF is capped at around ÂŁ30,000.
Around 5,000 final salary pension schemes face a shortage of at least ÂŁ300 billion. The funding shortage is seen as further evidence of the unaffordability of final salary schemes, which have become less attractive to many firms over the last few years.
The PPF provided an example of a case it dealt with involving a pilot with Monarch Airlines, whose pension scheme has passed to PPF control following a restructuring of the company. Having expected to retire on a promised pension of ÂŁ47,000 per year, the pilot was offered just ÂŁ26,500 in the proposed PPF plan. Commenting on the new situation, again in The Telegraph, the pilot, listed as fifty-one years of age, said:
“My pension is something I’ve paid into over the years and it’s something I was promised. I was paying over £1,000 a month from my salary, excluding the company contributions and I’ve always regarded my pension as deferred pay.
It wouldn’t be so bad if I was in a position to do something about it, but for me the time available is short.”
As always, the recommendation for anyone within a final salary scheme is to seek independent financial advice on your specific circumstances. An independent adviser will be able to investigate your scheme and to ask questions of its viability and suitability from the provider, before making a recommendation or giving you an idea regarding the level of risk involved.
Sources: The Daily Telegraph, 21st Feb 2015 – http://www.pressreader.com/uk/the-daily-telegraph/20150221/283523679291846/TextView
