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How robust are defined benefit schemes?

12/03/2018 … Author:

Defined benefit or final salary pension schemes have been making the news recently with the likes of BHS and Carillion as well as the Universities Pension featuring prominently, despite the decrease in their number there are still many people that rely or will rely on private sector defined benefit/final salary pensions for their income in retirement.

Defined benefit schemes are highly susceptible to changes in the gilt market and interest rates. This has made trustees of the schemes look at the assets they hold and whether they should move into riskier areas to help reduce the deficit.

The Pensions and Lifetime Savings Association (PLSA) produced a report highlighting concerns regarding the sustainability of defined benefit pensions in their current format and the ongoing liabilities they present to sponsoring employers.

There are various proposals being discussed to help schemes improve their performance and the probability of members seeing their benefits paid in full. This includes changes to legislation regarding the way benefits are valued before and after they come into payment, as well as a rationalisation of the number of schemes to reduce running costs.

These issues are clearly of concern to individuals who have been saving into defined benefit pension schemes and who may be in schemes which could struggle to meet their requirements.

The Pension Protection Fund (PPF) was set up to pay compensation to members of eligible defined benefit schemes, should they be unable to pay benefits beyond a minimum level. Should the scheme be taken into the PPF, there are caps in the level of compensation that can be paid. If a member has not yet reached their Normal Retirement Age, the cap at age 65 is 90% of £38,505.65, which equates to £34,655.05 per annum. From 6 April 2017, a Long Service Cap came into effect for members who have 21 or more years of service. The cap is increased by 3% for each full year of pensionable service above 20 years to a maximum of double the standard cap.

The ability of a pension scheme to meet its future liabilities is one of several areas looked at when assessing whether someone should transfer away from their final salary arrangement, with its safeguarded benefits, to a personal pension plan. There are many important factors that should be taken into consideration, such as a deferred member’s circumstances, their objectives in retirement and any additional assets and pension funds.

Transferring money out of a final salary scheme means the responsibility for managing the retirement fund lies with the individual, therefore it is vital that financial advice is sought to establish whether a transfer is an appropriate course of action.

Since April 2015, anyone seeking to transfer benefit from a defined benefit pension scheme, with a Cash Equivalent Transfer Value of £30,000 or greater, must take financial advice prior to any transfer of benefits. 

If you or someone you know wants to learn more about pensions transfers, a Lowes Consultant can talk through the options and, based on personal circumstances, help define whether a transfer could be beneficial or not.

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