There’s both good and bad news for employers struggling to fund expensive defined-benefit (DB) pension schemes. On the positive side, there is mounting evidence that many schemes have over-estimated how long they will have to pay out pensions for, which means they may be in a much stronger long-term financial position than is currently thought. Less happily, pension scheme deficits continue to mount up – and many employers may face a large bill in the months ahead.
The happier tidings are contained in new analysis of life expectancy rates from PwC, an accounting firm. During the first decade of the 21st century, life expectancies rose at an unusually rapid rate; as a result, the typical DB scheme now calculates its finances on the basis that it will have to pay out a guaranteed pension to 40-year-old members today until they’re 90 and 91 for men and women respectively. However, in the past five years, life expectancy improvement rates have slowed to a more typical historical trend level. This might suggest 84 and 86 would be a more realistic assumption, which would wipe a collective £310bn off the cost of financing DB schemes.
The sting in the tail, of course, is that this gain is predicated on many of us not living as long as is currently expected. And more evidence that life expectancy improvements are slowing will be needed before pension scheme sponsors can comfortably adjust their calculations, cautions PwC. In the meantime, many large employers can expect their pension schemes to be pushing for further financial support. DB schemes are required to value their assets and liabilities every three years, and to set out a plan of action if a deficit is identified.
Most pension schemes’ deficits have increased significantly over the past three years, which means schemes conducting reviews this year are likely to be in for a shock. Around a third of the 100 largest companies in the UK have valuations due this year, according to consultant JLT Employment Benefits, including Lloyds Bank and Tesco. Hence many of these businesses may soon come under pressure to spell out how they will address a rising pension scheme deficit.
Lisas winning over young savers
New research suggests lifetime individual savings accounts (Lisas) could become the retirement-planning choice for younger savers, with many set to quit workplace pensions to take advantage of the new scheme.
Lisas got off to a slow start last month, with only three providers launching products on 6 April, when the rules governing the savings wrapper came into effect. However, 32% of savers under the age of 40 envisage cutting back pension contributions in favour of a Lisa, according to a new survey from the insurer MetLife. Moreover, almost a third of those savers would stop pension contributions altogether if saving via a Lisa.
It’s not supring that Lisas are attractive to younger savers, especially on first glance. The accounts come with a government top-up bonus, worth up to £1,000 a year to those who invest the maximum £4,000 in the schemes, which is broadly equivalent to the value of tax relief that basic-rate taxpayers get on contributions to private pensions. Lisas can also be cashed in early by savers who need the money to fund a deposit when buying their first property.
This perception of greater flexibility – along with disillusionment with the pensions system – may persuade many savers that Lisas are a better option for retirement planning. However, accounts are in some ways considered to be less flexible than pensions, since savers not using the money for property purchase can’t access their cash without penalty until age 60, against 55 for a pension plan. Furthermore, anyone opting out of a workplace pension scheme will miss out on the valuable pension contributions from their employer.
In the news this week…
• The most tax-efficient investment you can make for your child is to pay into a pension for them, say James Connington and Richard Dyson in The Daily Telegraph. Children can benefit from 20% tax relief on pension contributions, up to an annual limit of £2,880. The tax relief on the full amount would then bring this up to £3,600. The effect of compounding returns from these amounts is impressive: if £3,600 was invested when a children turned one, the sum would have grown to £273,000 by the time the person reaches age 65, based on average FTSE All-Share returns of 7% per year.
If this money had been invested at age 25, it would only reach £54,000 by the same age. A child’s parent or guardian can open a self-invested personal pension (Sipp), with the account held in the child’s name. Anyone (such as a grandparent or family friend) can then make contributions into the Sipp, and these contributions do not take away from a depositor’s own allowances. Just keep in mind that a future government might change the rules to your disadvantage – for example, they may put back the minimum retirement age so that your child may not be able to access the money until much later than planned.
• Inheritances worth millions could be “ending up in the wrong hands” because of a “surge” in the number of estates being wrongly registered as intestate, says Carol Lewis in The Times. The government’s Bona Vacantia (Latin for “vacant goods”) division lists 10,585 estates as unclaimed, and that number is growing by around 50 a week. However, in about 20% of cases, the deceased has left a will, often in their home: it has simply not been found, says the International Association of Professional Probate Researchers, Genealogists and Heir Hunters (IAPPR).
This is because the government no longer pays private contractors to search for wills and instead conducts searches online (though not because of budget cuts, says a government spokesperson). “The solution is simple,” says Daniel Curran of the IAPPR. Will searches need to be reinstated, and individuals, especially those without next of kin, should be “made aware of the free-to-use central probate agency”, which can securely hold your will on file.