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UK Pension Black Hole

UK’s pensions black hole balloons 30% in a MONTH: Total deficit of final salary schemes soars £90bn to £384bn as Brexit hits funds

  • Total deficit of eligible schemes hits £383.6billion, rescue body says
  • £89billion added to deficit of eligible schemes in one month
  • Fears over impact of Brexit on private ‘gold plated’ pensions continues 

The potential black hole faced by the UK’s final salary pensions schemes has soared a massive 30 per cent in one month to reach a dizzying £384billion, figures showed today.

Put together, the deficits of all schemes eligible to join Britain’s pensions lifeboat in the event a company goes bust increased from May’s £294.6billion by a staggering £89billion, as Brexit fears have hammered the schemes’ investments in Government bonds.

Data from the Pension Protection Fund, which dishes out compensation to staff in certain circumstances, revealed the total deficit of all eligible schemes £383.6billion by the end of June, from £209.6billion at the same point a year earlier – an annual increase of 83 per cent.

Going up: The total deficit value of schemes eligible to join the pensions lifeboat in the event a company goes bust has increased by around 30 per cent in a year, the Pension Protection Fund said

Going up: The total deficit value of schemes eligible to join the pensions lifeboat in the event a company goes bust has increased by around 30 per cent in a year, the Pension Protection Fund said

With fears swirling over the potential impact of Brexit on the UK’s ‘gold plated’ private sector schemes, of the 5,945 eligible schemes, 4,995 are in deficit, with total liabilities standing at £1,747billion – the highest level since the PPF’s records started in March 2006.

The figures relate to defined benefit pension schemes, such as final salary schemes, which have become increasingly rare as many firms opt to run cheaper options.

A spokeswoman at the PPF said: ‘While the deficit has worsened significantly, it is important to remember that pension liabilities are long-term and these numbers need to be looked at in this context. As such, one month’s deficit numbers are not a cause for alarm.’

Companies with defined salary pension schemes build up pots to ensure that they can continue to pay retired employees for the rest of their lives.

The pots are invested so that they grow over time. However one of the predominant investments tends to be government bonds, known as gilts.

This is Money Brexit

These are seen as a good option because they are not very risky – it is very unlikely that the government will default on its debt and the gilts lose their value. However, the interest paid on gilts are at a record low so the returns pension funds are receiving are very low.

This is due in part to the uncertainty created around Brexit – at times of economic shock investors tend to opt for the least risky options – and gilts and gold come top of the list. The more popular they are, the more expensive they are to buy and the less they pay out in interest.

However pension funds do not have to pay out their full liabilities all at once – money is paid monthly to those who are already retired, and is not yet paid at all to those still in work.

So while a deficit is an issue if it is prolonged or becomes unsustainable, it is not necessarily a huge cause for concern in the short-term: funds may still have time to make up the shortfall when conditions are more favourable.

Sebastian Schulze, a Director at Redington, said: ‘The drastic rise in deficits is largely down to dramatic movements in the gilt markets.

Piling up: Of the 5,945 eligible schemes, 4,995 are in deficit, with total liabilities standing at £1,747billion

‘Yields on long-term gilts (the most relevant asset for valuing pension schemes’ liabilities) fell by as much as 0.4 per cent to 0.5 per cent after the vote.


Bond ‘yields’ are a measure of the annual return to investors who buy government debt. Bond ‘prices’ are the cost, or what these investors pay to buy the debt.

Bond yields and their prices move in opposite directions. When yields move up, prices fall.

But yields on both government and corporate bonds have been at very low levels for years – meaning they have rarely been so expensive. See the box below.

‘This resulted in a significant increase in the value of liabilities and deteriorating funding positions for those schemes which have failed to hedge interest rate risk.

‘The average UK pension scheme probably saw liabilities rise by as much as 10 per cent.

‘Meanwhile, generally, equity markets have not fared too badly. The FTSE 100 recovered quickly after the vote and since then has risen 10 per cent. From this, we can see the diminished funding position is not down to an underperformance of assets, but from a failure to take action on liability risk’.

Data through time: Aggregate liabilities and funding ratios of eligible schemes, according to the PPF

He added: ‘In this environment, schemes need to think carefully about the risks they are taking. The impact of the referendum is a painful example of why pension schemes continue to play catch-up with liabilities. For too many schemes, unhedged interest rate exposure has cancelled out any positive impact they have seen from asset performance.’


Staff enrolled to a defined benefit pension scheme are promised a certain level of guaranteed income in retirement.

Such schemes are becoming increasingly uncommon as employers look to run cheaper pension schemes.

Meanwhile, Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: ‘The UK’s gold-plated pension system is starting to look tarnished. Deficits are soaring, employers are reneging on their promises and still more money is needed.

‘Companies are having to divert profits into schemes to make good on their promises, which means less investment capital to help businesses grow and less money available to invest in the pensions of younger workers.’

Debt or surplus? Eligible pension schemes in deficit and running at a surplus, according to the PPF

Debt or surplus? Eligible pension schemes in deficit and running at a surplus, according to the PPF

The demise of BHS has plunged the world of pensions into the spotlight, after it was revealed the stricken retailer has a pension deficit of around £571million.

BHS fell into administration in April this year, just 15 months after being sold by the retail tycoon for £1 to three-times bankrupt Dominic Chappell.

Original Article from The Daily Mail

Chasm between Public and Private Sector Growing

The chasm between public and private-sector pensions is already marked, but the inequality is set to widen.

Final salary pensions – the most generous sort, which pay a retirement income linked to employees’ wages and length of service – are all but extinct for those of working age in the private sector.

But these guaranteed pensions remain a key benefit for public-sector workers and a source of growing envy for everyone else. In the private sector, most schemes have been replaced with so-called “defined contribution” pensions, into which staff save a percentage of their salary, plus a contribution from their employer. But the overall amount saved has fallen dramatically.  The benefits received at retirement depend on stock market performance, and there is no guaranteed level of income.

How much more generous are public-sector schemes? Analysis by Tilney Bestinvest, a financial planning firm, shows that on average the income provided by public-sector schemes is five times more generous than a defined contribution pension in the private sector.

Using the NHS pension scheme from 2015 as an example, a fully qualified nurse aged 25, earning £21,692 and joining the pension scheme today, will typically contribute 7.1pc of salary each year to fund their retirement. If they work for 40 years, stay in the same band of earnings throughout and attain 4pc annual increases in pay, they could retire on an annual salary of £45,500 in today’s money.

When they stop working, they will have amassed a pension worth £30,700 a year in today’s money, equating to more than two thirds of their final salary. This income is guaranteed by the state and will also increase each year in line with inflation, protecting its value over time. Taking into account the fact that retirees typically have lower outgoings and pay no National Insurance contributions, this is a significant pension income. So how does that compare with pension provision outside the public services?

Taking into account current annuity rates, if someone wanted to purchase the same level of income for life at the age of 65, they would need a defined contribution pension fund worth £2.2m.  This would involve the nurse contributing 43pc of her gross salary into a pension, assuming her fund grows by 5pc a year excluding charges. Assuming the nurse saved 9pc of her salary throughout her life and achieved 5pc net investment growth a year, she would end up with just over £458,000 in her pension at retirement. This could provide an increasing income of £6,366 a year at age 65 – around a fifth of the final salary pension.

Pension limits: one rule for public and another for private sector. The lifetime pensions limit, against which savings are tested when you take your pension benefits and on certain other key events, allows savers with defined benefit pensions – the vast majority of whom are in the public sector – to build up larger pensions without breaching it. Savers who exceed the lifetime limit, which is reducing from £1.25m to £1m in April, will be charged 55pc tax when they withdraw pension money above this level.  The disparity is created because the limit is calculated differently depending on which type of scheme you are in.

For savers with final salary pensions, the lifetime limit is calculated by multiplying the expected income at retirement by 20. This means someone with a £50,000-a-year pension income would still fall within the new £1m limit and could avoid penal tax.  For savers with defined contribution pensions, the lifetime limit is simply compared with the overall fund value.

But currently low annuity rates mean even large pots of £1m or more buy relatively little annual income. According to Legal & General, the insurer, a £1m pot would buy a 65-year-old man a retirement income starting at just £29,000 a year, assuming the income would rise by a modest 3pc a year and that his spouse would receive a half-share of the pension if he died first.

So are public-sector pensions running on borrowed time? One of the main reasons final salary schemes are rapidly disappearing for staff of private companies is that their workplaces are suffering from a pensions hangover from the Eighties and Nineties. Since life expectancy has risen unexpectedly, young workers are now helping to pay the price for their older colleagues’ longer retirement.

Wages have fallen from 87pc to 83pc of total employment costs over the past decade, according to research by Towers Watson, an actuarial firm. By far the most important explanation for this is increased employer pension contributions, as companies have been forced to plug growing deficits in their final salary pension schemes – which have promised to continue to pay older workers’ generous guaranteed pensions until the day they or their spouses die.

Taxpayers who fund public-sector pensions face the same pressures, but because workers are backed by strong unions and their benefits are protected by special government powers, they remain generous.

But this doesn’t mean that the disproportionately generous pensions public servants enjoy today won’t be scaled back at some point in the future.  In fact, some experts say that this is inevitable.

For example the Intergenerational Foundation, a think tank, has estimated that Britain faces a £1.3 trillion liability for pensions, equivalent to a £45,000 burden per household.  It argues that this is an “unaffordable” cost for younger generations, who are struggling with high housing costs, unemployment and students debts.

For original article, Click Here.

New Pension Limits for the 2015/16 Tax Year

  • You can contribute as much as you earn in a year, up to £40,000 a year
  • You can also use HMRC’s “carry forward rules” to use the past three year’s pension contribution limits – if you haven’t already
  • Once you start drawing from your pension your annual limit reduced to £10,000
  • The lifetime pension limit is reducing from £1.25m to £1m next year


  • Workers earning over £150,000 will have their annual pension allowance gradually reduced to £10,000 until they earn £210,000, at which point they no longer qualify for tax relief on contributions

The Punishing Pension Protection Fund

Savers in their forties and fifties are being “misled” over the safety of their final salary pensions and could suffer a 10 per cent cut to their retirement incomes, a senior official has warned.

In a stark warning, the head of the government’s pensions lifeboat said five in six final salary schemes had fallen into the red and faced a struggle to pay savers a full pension.

Alan Rubenstein, chief executive of the Pensions Protection Fund (PPF), said that many of the 11 million people with a supposedly guaranteed, inflation-linked pension were being led to believe their pension was safe, when “for many that isn’t the case”.

Savers who tried to cash in their final salary pots early, by using the new pension freedoms due in April, face losing up to 40 per cent of the value of the pension they’ve built up, he said.

The comments, in an interview with The Telegraph, represented the most overt warning from a government-backed organsiation since the crisis in the early 2000s when thousands of workers faced the loss of their pensions as companies collapsed with deficits in their schemes.

Mr Rubenstein, whose organisation was set up in the wake of that scandal to rescue final salary plans when they fail, said: “It is misleading to allow people to expect promised pensions when in fact there is only money enough to pay about 60 per cent of those pensions [should they be cashed in today] and where nothing is being done about the shortfall.”

Final salary pensions are typically worth a maximum two-thirds of a worker’s wages on retirement depending on their years of service, with payouts rising with inflation and half going to a spouse on death.

The pensions are more generous than schemes where the size of the pot is linked to the stock market.

George Osborne’s pension freedoms will arrive as the health of final salary pensions is deteriorating dramatically. Around 5,000 pension schemes face a funding shortfall of at least £300 billion, the largest since 2012, figures show. Low interest rates and the fears over Greece’s exit from the eurozone have conspired to increase funding costs for firms that offer final salary pensions.

A customer seeking to transfer their entitlements out so they can cash in the pension would typically get just £6 for every £10 in their name, Mr Rubenstein said, because schemes were so far in deficit.

If the company behind the pension was unable to meet its promises, it would have to be taken over by the protection fund. In such cases, most members are given 90 per cent of their predicted retirement payments each year. Wealthier savers stand to lose more as annual payouts are capped at approximately £30,000.

Those already retired will be protected, leaving those in their forties and fifties, who will claim benefits in future years, most at risk.

It is unclear how many schemes would fail, Mr Rubenstein said, because companies were hiding the scale of the problem.

“We should be having this conversation now, rather than leaving people under the impression they will have a pension as promised,” he said.

Mr Rubenstein added that while pension schemes with large holes in their finances were required to have “recovery plans”, some were unlikely to work, having been stretched over a nine-year period on average. Recovery plans are easily derailed if returns fall below expectations. Many companies were “travelling in hope”, he said.

Stephen Soper, chief executive of The Pensions Regulator, which oversees the funds, said:

“We are prepared to work with [struggling schemes] to try to deliver a solution that balances the interests of the members, PPF and employer.”

Many final salary schemes have closed as a result of long-term funding problems, with just 8 per cent open to new members, according to the National Association of Pension Funds.

The gap between the money held in such schemes and the pensions they have pledged to pay is widening dramatically.

While such pensions hold £1,200bn of investments, the most conservative valuation of their pension promises is closer to £1,500bn. This £300bn gulf has grown from almost nothing in just 12 months (see graph, below).

The shortfall highlighted in this data, however, is not the real extent of the gap. The £300bn figure is based of the reduced pensions that workers would be paid if their scheme collapsed and had to be taken over by the PPF.

In broad terms, if your scheme fails – in most cases because your current or former employer goes bust – the PPF will step in, paying 90pc of promised pensions up to an annual cap of £30,000. For most workers the cap is high enough to mean they receive 90pc of their promised income. But for higher earners, with big pension entitlements, the cap can inflict a brutal loss of retirement income (see repot, below).

The gap between pension schemes’ investments and the value of actual promises made to pensioners is therefore far higher than the £300bn that would deliver the PPF level of payouts. One independent estimate, by Citigroup, put the real gap at £850bn.

Even figures from the Pensions Regulator, the body charged with monitoring schemes’ solvency, suggest that if schemes had to pay all their pensions as promised today, they would be 45pc short.

It is possible that shortfalls could shrink in time if investment returns grew and companies contributed more. Mr Rubenstein said: “You shouldn’t be scared by one month’s numbers. But companies need realistic recovery plans. Many are on life support at the moment, kept alive by cheap loans.”

Actuary Henry Tapper, of consultant First Actuarial, said: “There is no silver bullet. There is no obvious factor that will induce growth. The only guarantee is what the PPF would pay if it had to take over your pension.”

The PPF expects to bail out twice the value of pensions in the coming year as in the previous one. This increase is not due to a rise in insolvencies, but to the growth of the shortfalls in the funds that fail.

Pilot’s pension cut from £47,000 to £26,500

The Pension Protection Fund, the lifeboat scheme for savers in stricken salary-linked pensions schemes, is able to guarantee most people 90pc of their promised pension.

But for bigger pensions the scheme has a cap. The most you can receive is £36,000 per year – less if you retire before you are 65.

The pension scheme of Monarch Airlines is currently being taken over by the PPF following a restructuring of the company. There was not enough money in the fund to meet all the pension promises made in earlier years. While most staff’s pension will fall below the cap, meaning they will get 90pc of their entitlements, some high-earning pilots will see drastic cuts.

One Monarch pilot, 51, who did not want to be named, planned to use his generous promised pension of £47,000 per year to help his children and pay off his mortgage. But he and his wife have been forced to rethink their plans because under the PPF they will get a maximum of £26,500. “I’m still in a state of shock,” he said. “It’s like a grieving process. There’s this sense of injustice. My pension is something I’ve paid into over the years and it’s something I was promised. I was paying around £1,000 a month from my salary, excluding the company contribution, and I’ve always regarded my pension as deferred pay. It wouldn’t be so bad if I was in a position to do something about it, but for me the time available is short.”

See The Telegraph for original article.

Osbourne Tinkering Too Much?

Five out of six of Britain’s “final salary” pension schemes do not have enough money to pay the pensions promised to workers, according to the latest official analysis of the £1.3 trillion sector. The difficulties faced by these schemes are worsening thanks to an array of factors – many of them related to tax and other legislative changes introduced in recent years.

If – as previously thought likely – George Osborne cuts pension tax relief for higher earners in his March 16 Budget, those schemes which remain open for employees to build up further benefits will “shut overnight”, according to Britain’s foremost pensions body, the Pensions and Lifetime Savings Association.

Mr Osborne is this weekend reported to have pulled back from such action, following angry protests by MPs. But experts say the damage is done: a pension system famously referred to as “the social security miracle of the Western world” is set to sink.

Final salary pensions pay a retirement income linked to workers’ wages. For decades they were the norm, and Britain’s comparatively high level of pension saving is due almost entirely to the billions still locked away in these schemes.

But they are moving inexorably into the red, increasingly unlikely to be able to pay the retirement incomes promised to members. As it stands, of the total 5,945 schemes more than 4,900 are in deficit. If these pension schemes were required to fund their collective pension promises today, most would fail.

A dwindling number of schemes still allow workers to build up benefits.  In 2010 roughly half of schemes were “open” to further saving.

Today the proportion is nearer one in five, according to the Pensions and Lifetime Savings Association (PLSA – previously known as the National Association of Pension Funds). These schemes would shut at once were higher-rate tax relief to be scrapped, the PLSA said.

Helen Forrest Hall, a final salary specialist at the organization, told Telegraph Money: “It would be virtually impossible to allow new benefits to accrue if tax relief were cut, because would be less going into the scheme – but the same promises would still be required to be met.”

In a PLSA poll of its members it emerged that 86pc of pension schemes said they would stop taking new contributions if the Chancellor changed pension tax relief. Even if these schemes were to close, their problems would not be wholly solved.

“The assumption is that if you stop allowing employees to build further benefits you would be protected,” Ms Forrest Hall said. “In fact other problems would emerge. Pension schemes could face cashflow issues, for example.”

These could arise because most “open” schemes pay current pensioners with some of the contributions from those still in work. If the contributions dried up, the scheme might have to sell assets – shares and other investments – to raise cash.

This could come at inopportune times in the market. Pensions lawyer Martin Jenkins of solicitors Irwin Mitchell LLP is more apocalyptic. “In the past, final salary pensions were without doubt a good thing for all employees from the factory floor to the boardroom. The problem companies faced was how to finance the benefits.

“Now, if tax relief is reduced, the burden switches the other way. Employees will struggle to see whether it is even worth saving into the scheme.”

‘Uncertainty is killing off the best workplace pensions’

Mr Jenkins points out that many final salary pension schemes are far larger than the businesses whose employees they were set up to serve. “In some cases even the shortfalls within the pension funds are larger than the sponsoring employers,” he said. “Even without a loss of higher-rate tax relief, too much is happening too fast. It’s like cars changing lanes at breakneck speed.”

The National Insurance hit

Final salary pension schemes are foundering mainly because pensioners are living longer than expected, and because in recent year’s investment returns have been low.

But the schemes face a raft of other pressures, including fallout from tax changes already introduced. From April 6, for example, pension schemes will lose a tax break worth roughly 3pc.

This is going because “contracting out” – whereby a worker’s company pension scheme took on the responsibility to provide the equivalent to the second state pension – is being abolished. Irwin Mitchell calculates that for every employee earning £40,000, the change will cost an extra £1,162 per year.

Other tax changes have added hugely to schemes’ workload. In July 2015 George Osborne took aim at top earners, limiting the extent to which they could save each year on a sliding scale. The basic annual limit for most taxpayers’ pension contributions is £40,000.

For 45pc taxpayers the annual maximum that can be saved into a pension falls to £10,000 once their income reaches £210,000. In practice, preventing employees from breaching this becomes complex and costly for the schemes.

Visit The Telegraph for the original article.

Pension Freedom Changes

What the government calls “pension freedoms” will be in place from Easter Monday. But anyone nearing retirement would do well to note the drawbacks, as well as the advantages.

  • Taking money out of your pension could still land you with a large tax bill.
  • From next year, a new limit on the total size of a pension pot could mean your income from an annuity will be less than you expect.
  • Many in the industry fear a new wave of fraud.
  • It will soon become harder to qualify for a full state pension.
  • Without proper advice, the changes could make it easier to run out of money before you die.

1. Who is affected by the changes?

The big change affects 4.5 million people with Defined Contribution (DC) schemes.

With this type of scheme your monthly pension savings go into a big pot, which will eventually be used to buy an income for your retirement. You can now access that pot freely from the age of 55 (57 from 2028), taking out as much as you like, subject to tax.

Some people with Defined Benefit (DB) pensions – which promise a particular annual income – will be able to swap them for DC schemes.

2. How much tax will I have to pay?

You can take 25% of your pension pot as a tax-free lump sum. Or you can take out smaller amounts, of which the first 25% will be tax free on each occasion.

But you will have to pay income tax on the amount you withdraw over and above the 25% tax-free allowance.

If that amount, added to the rest of your income, exceeds £42,386 (2015-16), for example, you will pay tax at 40% or more.

If the amount exceeds £100,000, you will begin to lose your personal allowance, resulting in an even higher tax charge.

3. What tax will I have to pay if I buy a pension income?

If you buy an annuity (an income for life), or you take income drawdown (leaving your pension pot invested), you will only pay tax on the income.

Anyone with total income below £10,600 in 2015-16 will not pay anything.

4. How easy is it to pass on a pension to my dependants?

The new rules make it easier. If you die before the age of 75, the pension pot can be passed on tax free.

If you die after 75, and your descendants want the whole pot as a lump sum, they will have to pay 45% tax, instead of 55% previously.

However, the government is considering whether to reduce this to an individual’s income tax rate – known as the marginal rate – from April 2016.

Those who draw down income from an inherited pot will, in any case, pay tax at their marginal rate.


5. Are annuities still a good idea?

The pension changes mean that many people who would have bought an annuity, will not now do so.

Income drawdown is a more flexible option for many. In fact it has not been compulsory to buy an annuity since April 2011.

Nevertheless, for many people, annuities will still be the best option – or a mixture of an annuity and drawdown.

6. Can I sell an annuity if I have already bought one?

In the Budget of March 2015, the chancellor said he would make this possible, and the government will now carry out a consultation. This could allow you to swap your annuity for cash, from April 2016.

However, no one knows how much demand there will be for second-hand annuities. Many suspect that those selling their annuities will find it hard to get a good price.

7. What if I am in a Defined Benefit (DB) scheme – can I move to a DC scheme?

In theory you can – if your employer allows it. Transferring to a DC scheme means you could get your money out more easily, and pass it on to descendants. But again, you may not get the best value.

DB schemes usually offer inflation proofing, and the ability to pass some of the income on to a spouse.

They also have a particular advantage if you are getting close to the maximum amount you are allowed to have in a pension pot (see below).

8. What are the new rules on how much you can save in a pension?

From 6 April 2016, the maximum you can have in a pension pot will be £1m, reduced from £1.25m. This figure will rise with inflation from April 2018. The government says the change will only affect wealthy people.

But a 60 year-old spending all their £1m pension pot on an inflation-linked annuity could – according to current annuity rates – expect a maximum annual income of around £27,000. You can have a larger pension pot if you wish, but you will pay 55% tax on any withdrawals.

However, anyone in a DB scheme will be treated more generously.

Such schemes have a notional capital value, calculated by multiplying the annual income by 20. So if the scheme pays an income of £10,000 a year, the notional value of the pension pot is £200,000.

Given that the maximum pot will now be £1m, members of DB schemes can therefore expect annual incomes of up to £50,000.

The annual allowance for pensions savings remains at £40,000.

9. Is the state pension changing?

Yes. From 6 April 2016. The additional state pension and part of pension credit is being abolished, to be replaced with a single-tier state pension. The rate will rise from £113 a week to around £155, but the precise amount will be set towards the end of 2015.

However, most people will not qualify for the full pension, as their schemes were contracted out of the second state pension, and they paid lower National Insurance (NI) contributions as a result. To qualify for the full pension, you will now need 35 years of NI contributions, instead of 30 previously.

 Information originally from BBC