Pension Crisis

Media Interest

Since the huge "Maxwell" pensions scandal and also the pensions mis-selling fiasco in the early 1990's company pension schemes have become a regular talking point and gradually people have taken more interest in their own company pension scheme.

More recently, the media has taken an increased interest in the plight of company pension schemes as many of the well established firms or "PLC's" have closed or wound-up their occupational schemes. Unfortunately it is all too common to see a report on the news highlighting the plight of an individual who will be working well into their 70's as their retirement plans haven't worked out.

Final Salary Guarantees

It is important to understand that Company Final Salary Pension Scheme benefits are not "guaranteed". It is effectively a promise from the sponsoring employer(s) to contribute enough money into the pension scheme now and in the future to provide the pension calculated at retirement. One of the more recent Final Salary disasters involved the ASW Pension Scheme. One member of the scheme interviewed on television explained how he had contributed to the scheme for nearly 30 years only to find that not only had he been made redundant but the pension he had realistically expected at retirement was nothing like what he was going to receive! This case, as with so many others, unfortunately highlights how an employer could "stitch your pension up" without breaking the law.

Final Salary Closure

One of the main topical points at the moment is for companies to close their final salary pension schemes and change to money purchase schemes. The reason some companies have decided to change is due to a number of reasons. For example;

• In 1997 the government introduced 10% tax on dividends earned by pension schemes, these dividends play an important element of the schemes long-term health and this taxation has caused huge disruption.
• A new accounting practice FRS17, which has not yet been introduced but is likely to be in due course, has caused concern amongst company accountants, as it requires employers to be more transparent about the pension schemes liabilities.
• During the last few decades the age people are expected to live to has drastically increased, pensions scheme will therefore have to pay pensions for a longer period of time.
• Companies no longer want the liability of operating a final salary pension scheme. Ongoing costs including running the schemes administration, paying employer contributions and absorbing the pension funds "ups and downs" on the stockmarket.

If a company changes its scheme to a money purchase arrangement the majority of the issues highlighted above are removed, this ultimately saves the employer a whole lot of money!