Costs of Final Salary Pension Schemes Spiraling Out of Control

Pension (UK)
By Jami Maree Lock

In March alone, despite efforts and contributions to meet spiralling costs, 80% of British companies who run final salary pension schemes have seen their deficit rise an alarming £35 billion.  According to The Pension Protection Fund, the aggregate deficit of these defined benefit pension schemes rose to £236.6 billion from £201.5 billion in February.  Compared to the deficit total of £204.2 billion this time last year, this record shortfall could signal the death of even more final pension salary schemes. [EXPAND Read more]

Gilts are taking the blame for this sharp increase in money owed.  Recently, there has been a dramatic drop in the British Government gilt yield.  As gilts are staple investments for a majority of pension funds, any decrease in availability makes it harder and costlier for pension funds to shore up liabilities unless they start including riskier assets to their portfolios.

Currently, 6,316 defined benefit pension schemes exist in the UK, with 5,080 of these schemes operating in deficit.  Despite injecting over £12.7 billion into their ailing pension schemes, many companies have already closed their final salary pension plan to new members, and the number continues to rise each month.   Other companies have decided to take the next step and freeze pensionable salaries altogether.

Towers Watson, a global professional services firm based in Leeds, is following the struggling funds closely.  Senior consultant, Adam Boyes, commented on situation:  “The underlying picture is clear: despite the huge sums that companies have paid into their pension schemes, deficits have got bigger. For some employers who closed their final salary schemes to new entrants a long time ago, this will be another reason to consider stopping existing members from building up further benefits as well.”

Pension fund trustees have some very difficult choices to make.  Often, trustees have to choose between making larger contributions to reduce their fund’s deficit or accept that it will take much longer than anticipated to pay off the debt.  Choose the former and company’s annual contributions could double; avoid making a change and it could be almost a decade before the company can shake the deficit loose.

Another spokesperson for Towers Watson, John Ball, explained the quagmire these companies find themselves in:  “Many employers will find the substantial sums injected into their pension schemes have not even allowed them to stand still. If a scheme’s plan to clear its deficit is behind schedule, the response will usually involve some combination of pedalling harder to catch up, and accepting that it will take longer to reach the destination.”

Regardless, it is clear that final salary pension schemes are on the way out.  Rising costs, difficult economic times and poorly operating funds continue to devalue these funds.  For the millions of UK adults with final pensions, some serious retirement planning is in order.  As the old adage goes, “don’t put all your eggs in one basket.”  Perhaps it is time to start looking at alternative, complimentary ways to save for later in life.  Over 50s Plans and Stocks and Shares ISAs are two savings plans on offer from providers like Shepherds Friendly.  The first plan is designed to cover expenses and limit financial burden on loved ones for arrangements required after your passing.  The latter option allows you to save free from Income and Capital Gains Tax.  Both plans can offer additional ways to save your hard-earned money, a great compliment to a pension plan that could potentially no longer see any further growth. [/EXPAND]