The UK Pension Deficit: what about my pension?

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DC pensions

Pensions

“UK Pension Deficit.” What does it mean for the UK expat? What are you going to do about your UK Final Salary pension? The biggest UK companies continue to struggle to fund the pension schemes on which your retirement is possibly based.

Research from Barnett Waddingham, the actuary, found that the pension deficit of the top 350 publicly listed companies – the ‘FTSE350’ – has reached £62 billion, reported in late August 2017 in the UK’s Guardian.

What does “Pension Deficit” mean?

The UK Pension Deficit is the difference between:

How much companies need to put aside to pay out their retiring former workers and contribute to the retirement fund of their current workers

Compared to:

How much companies are actually putting aside.

The up-to-the-minute research shows that the deficit figure for the top 350 UK companies comprises 70% of the companies’ profits – an astonishing amount that arguably will be impossible to find (despite recent attempts by some of the biggest companies to make lump-sum contributions.)

The statistics point to a future scenario where retirees don’t get the benefits they expected.

How has the UK Pension Deficit come about?

Defined Benefit (DB) pension schemes – which pay a fraction of a worker’s final salary level as an ongoing retirement income – have formed the generous but ultimately-unsustainable structure of UK pension provision for the last few decades. Ever-lengthening life expectancy has made funding retirement more expensive.

Companies have responded in the last decade with shifts to lower-cost pension structures such as Defined Contribution (DC) schemes, where the benefits are related to investment performance. But many at or near retirement remain in Final Salary schemes and, while providers often talk about ‘guarantees’, there is nothing to stop your benefits being slashed when the funds for the pension overall fall short.

Interestingly, Barnett Waddingham found in previous research that the increase in UK life expectancy may be slowing, but the broad facts remain the same: with the FTSE100 companies having liabilities topping £100 million, adjusted for inflation, people may well outlive their company-based benefits.

A way to beat the Pension Deficit?

Check out how you stand personally. If you’re in a Defined Benefit (DC) pension scheme, it is worth learning more about how the scheme works from your provider. You have the right to a calculation of the total contribution (ie. that of you and your employer, if there is mutual input) to your company pension every year – what’s called a Cash Equivalent Transfer Value (CETV). A second CETV in the same calendar year will cost you a few hundred pounds. This will give you a snapshot of what funds you have right now in the company pension.

If your company gives no specific indication of a funding shortfall, the latest research from Barnett Waddingham should spur you on to consider this: what if my pension benefits are reduced down the line?

Don’t panic. There’s somebody who will have some sort of answer: your financial adviser will be well versed in this unthinkable scenario! If you share with your IFA this CETV snapshot of what funds you have now, you can get thinking about how much contribution has been made relative to the number of years worked so far at the company. You can then project forward: where might this lump sum be in five years down the line? And in what areas are you pension contributions invested – what’s the growth rate?

It could well be that you and your adviser consider installing personal savings and pension options to augment what’s being paid into your company pension. You can then know for certain what’s being put aside each month, at what growth rate, and the underlying portfolio of such personal structures can be adjusted ongoing.

Your retirement is in your own hands. And you need to take a serious look at what the UK Pension Deficit means for your financial planning.

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