The Government is coming under increasing pressure to make a "u-turn" to try and prevent or slow down the mass move away from salary related pension schemes by employers. The Unions are starting to make noises as well as MPs, journalists and other industry commentators.
So what is this so called 'crisis'? In plain English, a Final Salary Scheme (or one that is related to your salary) has certain guarantees or promises that have been made to you. In simple terms, if you are a member of a pension scheme for a particular period then you acquire a pension scheme which is a proportion of your salary. e.g. If you have a 1/60ths scheme and you are a member for 20 years and you earn £30,000 at retirement. Your pension is 20/60ths of £30,000 i.e. £10,000 per year.
This sort of promise costs a huge amount of money. Let's assume annuity rates 10 years ago were 10% and let's assume the annuity rate today is 5% .......10 years ago: to buy a £10,000 per year pension income your pension fund would need to purchase an annuity of £100,000 paying 10% per year ie £10,000 pa
Today: to buy a £10,000 per year pension income your pension fund would need to purchase an annuity of £200,000 paying 5% per year ie £10,000 pa Double the cost that it used to be! Add to this the following changes introduced by Government:
1) These pensions cost even more now as the benefit is required to increase each year when being paid to allow for inflation.
2) There was a Minimum Funding Requirement, which meant that pension schemes could not operate in a debt situation i.e. there must be enough money in the 'pot' now to pay for future pension liabilities. This meant employers paying massive contributions into schemes to make them "solvent". We are not talking the 3% or 5% that you pay in but sometimes 10%, 20%, 30%, 40%, 50% and more of salaries being paid to catch up in time.
3) Poor investment returns generally have forced employers to pay even more in to try and cover liabilities. Tax changes on what tax credits are allowed to be claimed back reducing performance have also increased costs, a so called "stealth tax" which raised £5bn for the Treasury.
4) New accounting standards have been introduced which impact how the investments and liabilities are valued (FRS17), piling more costs on employers.
5) Stricter rules on how schemes are looked after following the Robert Maxwell affair.
6) Having to change to rules to allow more people to join including part-timers, even having to allow part-timers to back claim.
Is it any wonder that employers are reeling at the massive increased costs and looking at alternative pensions which are linked to investment performance rather than guarantees of a fraction of your salary.
If you were an employer - would you prefer an unlimited payment with liabilities for pensions that you have to meet come what may - even if it risks putting your business under or a simple 3% or 5% or another fixed percentage of salary into your employees pension? Yes, you would probably do the same as your employer.
As a result many employers are looking to close their pension funds and look at cheaper alternatives. Are you an employee who has been offered this type of change and do not know what to do?
Are you an employer struggling with your obligations? Contact us for help now.