Death knell for final salary pensions

The current economic climate is proving tougher and tougher for defined benefit pension schemes, revealing that perhaps their time is up. According to Aon almost two thirds of the largest private pension schemes are now in deficit. It predicts losses of £226bn for the UK’s remaining final salary schemes.

This is not a good time for companies to make additional contributions – they may be fighting for survival themselves. The Pension Protection Fund (PPF) said it expects pension compensation claims to rise over the next 18 months due to adverse economic conditions.

The PPF is funded in the main through the pension protection levy that occupational pension schemes pay. Loosely speaking, the amount to be paid depends upon the “level of a scheme’s liabilities relating to members” and “the funding level of a scheme and the risk of its sponsoring employer becoming insolvent”. There’s plenty of detail for those who want it on the PPF website.

Interestingly, if you qualify for your pension you get 100% compensation (although inflation indexation may be lower than your original scheme) but if you are not yet old enough to receive your pension the compensation is 90% subject to an overall cap that depends on your age – as at April 2008 that cap for a 65 year old equates to just over £27,770. What about people who are about to retire as opposed to those who have just done so – perhaps only separated by a matter of months – do they really deserve lower compensation? To be honest, the details are far more complex than my brief comments here but there is certainly a discrepancy between members and deferred members and I just don’t see the logic in that.

Is your defined benefit scheme covered by the PPF? You can view the eligibility criteria here.

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