The latest Pension Support Index from accountancy firm PwC has just revealed that the ability of some of the biggest companies in the UK to fund their defined benefit pension payouts to employees has dropped significantly.
In fact, the report revealed that these schemes are now at the weakest they’ve been since the recession, with a score of 69 out of 100 recorded – down from 82 seen last year. This is the lowest the score has been since 2009.
Head of PwC’s pensions credit advisory practice Jonathon Land explained that this drop could be down to the size of the schemes available, noting that obligations to employees have increased because people are living longer and gilt yields have fallen. As such, schemes should be focusing on the strength of the employer and its ability to make increased pension contributions, as well as the risks involved with investment strategies.
“This year’s index score is the largest drop since the recession. The last time we saw a fall this big was because of company performance, this time it’s because of scheme size. If a combination of political uncertainty following the election and Brexit leads to another economic jolt to company performance, this would be a double-whammy for pension scheme support,” Mr Land went on to say.
Defined pension schemes work by guaranteeing that you’ll receive a set percentage of your salary when you retire, with pensions paid out for the rest of your life. They represent a relatively safe option for employees because your pension will only be put at risk if the company you work for goes bust – and you would still receive a smaller payout from the Pension Protection Fund in any case if this were to happen.
However, unfavourable interest rates since the credit crunch have made it harder for companies to generate the returns needed to fulfil pension promises, with big shortfalls seen in some schemes resulting in firms having to divert even more of their profits to keep them going.
If you’re in a private sector defined benefit pension scheme, you can transfer it all over to a defined contribution pension – as long as you’re not already taking your pension. These can be accessed from the age of 55 so it’s likely to be an attractive prospect for many approaching retirement age.
However, it’s worth bearing in mind that if you do transfer from a defined benefit pension scheme then you could be giving up some valuable benefits and could even end up being worse off – so think about this, even if you’re given incentives by your company to switch.
Seeking help from an independent financial adviser about pension investments and more would certainly be a good idea so you can avoid any pitfalls and go into it with your eyes wide open. If you’d like to find out more, get in touch with us at The Pension Place today.