Pension Enhancements – Is it time to consider alternatives?

The Situation

1. Concerns Over Pension Stability: Some high earners are worried about the potential collapse of their pension schemes.
2. Cost-Cutting Trends: Companies are looking for ways to reduce pension costs and, as a result, are trimming benefits. As an outcome, a handful of workers might benefit from accepting ‘enhancements’ proposed by their employers to transfer their pensions elsewhere.

The Controversy:

1. Pension Minister’s Views: Steve Webb, the pension minister, has shown concerns over companies effectively enticing employees with offers to relinquish some benefits or shift to another pension format. The primary motive here is the company’s savings, which might not always align with the employee’s best interests.
2. The Offers on the Table: The common offers include ‘enhanced transfer values’ (ETV) for transferring out of final salary linked pensions or receiving a larger pension now in exchange for sacrificing future inflation-related hikes.
3. Financial Gaps in Pension Schemes: Final salary pension schemes have a funding deficit, referred to as a ‘black hole’, of £295 billion according to KPMG.

Key Considerations:

1. When to Make the Move: Most employees are better off without making a move. However, if they earn around or more than £50,000 a year, they might consider switching due to limited compensation from the Pension Protection Fund (PPF) if their company runs into problems.
2. Compensation Caps: There’s a cap on compensation by PPF. So, if someone expects to retire with two-thirds of their final salary and earns around £50,000, they won’t get full compensation for a lost pension. The revaluation of benefits aligns with inflation, but with specific caps depending on the service date.
3. Protection for Current Beneficiaries: If a company and its pension scheme fail, those already drawing from the pension are fully protected under the compensation scheme. However, the PPF can adjust these benefits if deemed excessive.

Other Factors:

1. Health: Those in poor health might consider taking an ETV or a larger pension now, as their life expectancy might influence the total pension they might receive.
2. Advice Challenges: Professionals are cautious about advising on transfers due to potential claims of bad advice and the inherent uncertainty in the outcome.
3. Nature of Pension Benefits: Pension benefits from final salary schemes are essentially promises, which might not be fulfilled if the scheme is underfunded. In many cases, companies might have over-promised, leading to potential cuts in the future.

Grave Outlook:

1. More Schemes at Risk: Some experts believe more pension schemes will fail. There’s even a fear that PPF itself could collapse, noting similar challenges faced by the US equivalent.
2. Proof of Strain: A clear sign of the strain final salary pensions are causing is seen in companies attempting to dodge pension liabilities, like carpet manufacturer Brintons and bedmaker Silentnight. This signals potential warning bells for employees.

Conclusion

There’s a shifting landscape in pension schemes. While most employees might remain unaffected, higher earners and those with specific concerns should evaluate their positions, keeping in mind company stability, personal health, and potential pension benefits. Consulting with a financial expert is essential before making any decision.