Relying on a “defined benefit” pension? Don't

Just because you have been promised a particular pension income in retirement doesn’t mean you are going to get it, says Merryn Somerset Webb.


Staff at BHS probably thought their pension was safe

How safe is your pension? If you have a "defined benefit" pension based on your final salary, linked to inflation and paid for as long as you live you probably think it is pretty safe. But the events at BHS should make you think again.

Its £571m pension fund deficit is big. But it is also the tip of a very nasty iceberg: the companies in the FTSE 350 alone have a total deficit of around £84bn, and of the 6,000-odd funds covered by the Pension Protection Fund (PPF), around 80% are currently running deficits (to a total of over £300bn). If the firms they are attached to stop paying in, they won't be able to meet the generous pension payments they owe.

And just to be clear about the dangers this isn't just about private firms. The PPF is also the last resort for schemes such as the University Superannuation Scheme, the pooled vehicle for all university pension schemes in the UK. As Philip Aldrick points out in The Times, this now has a deficit of £19.5bn (on assets of £49bn). That's up from a mere £8bn in 2013 and means that there is talkabout how to slash both risk and pension benefits inside the scheme.

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Pension deficits don't always matter to pensioners. Strong companies can manage them by increasing contributions in the short term; by creating realistic plans to do so over the long term; or by being able to wait out the interest-rate cycle (when rates rise, technical deficits will fall see past posts here). Sensible pension trustees will shift their asset mix to get higher returns and use those projected higher returns when they calculate their deficit.

But they matter enormously when they are connected to weak or unwilling companies. Right now there are nearly 11 million people who count themselves members of defined benefit pension funds. Over four million of them are getting their pensions already (lucky, lucky them!) and nearly six million are in line to get them on retirement. Those six million should be keeping a very close eye on their companies. There are, as Jeff Prestridge says in the Mail on Sunday, "real concerns over the sustainability of defined benefit company pension schemes".

There may well be more trouble ahead. The Pensions Regulator which is supposed to keep an eye on all schemes so that they don't end up with the PPF doesn't seem to be doing the best of jobs: it did not, for example, know that Sir Philip Green had sold BHS until its staff read about it in the papers. Super-low interest rates will be with us for the foreseeable future. And young people might start to object to their wages being kept down because firms are paying all their surplus cash into pension funds,

Just because you have been promised a particular pension income in retirement doesn't mean you are going to get it.

PS This isn't just a problem in the UK. In Switzerland, economists have warned that negative interest rates may push domestic pension funds into bankruptcy. In the US, public pension fund deficits are killing state and city services. And in France, the chief executive of the country's largest public pension fund has said that the European Central Bank's determination to keep interest rates this low (-0.4% at the moment) will eventually mean that "many pension funds in Europe will implode". Buying French bonds today, he told the FT last week, leaves him "unable to fulfill my fiduciary duty".

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.