Pensions Can Cut Pay Outs

Pensions Can Cut Pay Outs.

The Department for Work and Pensions (DWP) has issued a consultation document in which it proposes that defined benefit and salary related pension schemes may be allowed to change the rules and cut pension income pay out promises if they are struggling.

Many larger employers have already closed defined benefit schemes to new members will also the Government following suit with swinging changes to ‘government’ employees such as the NHS, the Police, Armed Forces, Fire Fighters, local government and teachers.  This is the reason that BHS is in the news with a huge deficit i.e. there is no enough money in the fund to cover its liabilities in its pension scheme with calls for payments from its former boss Sir Philip Green.

The consultation is called “Security and Sustainability of Defined Benefit Pension Schemes” and the DWP is asking for comments on the same.

Whilst there is much covered in the consultation for:

• Funding and investments      
• Employer contribution and affordability 
• Member protection The headlines have been grabbed by the section on:

Consolidation of schemes

The consultation suggesting that DWP wants to agree standards for consolidation of schemes and multi-employer ‘super tanker’ schemes.  But more importantly it wants to consider making it easier for schemes to change benefits and simply pension schemes.

What could this mean?  Our headline say’s it all “Pensions Can Cut Pay Outs”

We have seen headlines banded around suggesting losses to pensioners of up to £20,000 each with changes such as the measure of inflationary payment increases from the old Retail Prices Index (RPI) to the lower Consumers Prices Index (CPI).  Even the government went down this route by changing the measure of inflation and indeed asking pension scheme members to pay more in or move to lower benefit schemes.

What is there pressure of Defined Benefit Schemes?

Annuity rates (linked to gilt yield and interest rates are at an all-time low.  Imagine if you owe an employee a £10,000 pa pension.  When annuity rates were 5%, this would cost the pension scheme £200,000 to buy (£200,000 x 5% = £10,000 pa).  Now that annuity rates sit at around 2.3% for an inflation linked guaranteed pension with 50% spouse benefits, the real cost today for a £10,000 pa is around £434,782.  This is more than double the cost for each employee.

No wonder employers cannot afford these schemes and they are in deficit.

Add to this the following pressures of:

• We are living longer meaning it must pay out for longer
• Inflation is creeping up meaning payments could be bigger
• Stock market investment returns are volatile
• The pound is weak
• Interest rates are low

There is mounting concern for the stability of defined benefit schemes.  The reality is that not just employers but definitely employees simply do not pay enough in to these pension schemes to justify the benefit that they then receive.  Something must change hence the consultation paper.