Advertisement

Coronavirus crisis hits occupational pension schemes

A sharp fall in stocks and bond yields has damaged occupational pensions, endangering benefits.

Members of generous final-salary workplace pension schemes could see their guaranteed benefits jeopardised by the Covid-19 pandemic. Many such schemes are in deficit: they lack the money to make good on all the pension promises made to employees . 

In the short term, the outlook has improved. The Pensions Regulator has now given employers longer to make up this shortfall since many firms are suffering from the pandemic. 

Advertisement - Article continues below

This will help employers squeezed by the virus. But it will mean that pension schemes operate with larger holes in their finances for longer. And if the business fails to recover, it may leave the pension scheme short of the funds it needs to pay pensions, both to those already retired and to future pensioners.

A regulatory gamble

In such circumstances, the Pension Protection Fund (PPF), the industry lifeboat scheme, would typically step in to pay pensions, but only up to a certain level. The PPF has maximum cash limits on the payouts it makes and also requires those yet to retire to accept a 10% reduction in their pensions.

Advertisement
Advertisement - Article continues below

The Pensions Regulator is therefore taking a finely judged gamble. By giving employers longer to reduce final salary pension scheme deficits, it hopes to ease the pressure on their finances, helping them to survive the Covid-19 crisis. 

However, where businesses do not make it, their pension financing problems may become more pronounced, resulting in bigger benefit reductions for members not fully covered by the PPF.

Advertisement - Article continues below

The position will also be complicated by the nature of each pension scheme’s investments. Final-salary pension funds with substantial exposure to the stockmarket have seen the value of their investments fall sharply in recent weeks.

Another problem is that historically low gilt yields, which have fallen yet again, reduce the interest rate used to calculate long-term returns on a scheme’s assets. Those in schemes run by private-sector employers hit by the pandemic will need to follow updates from their schemes’ trustees carefully, particularly where their schemes are in deficit.

Meanwhile, members of defined-contribution workplace pension schemes also need to keep a close eye on their situation. For employers struggling with Covid-19, reducing the contributions they make to such schemes on behalf of staff may be a tempting source of savings – and the rules usually allow them to do so. Crucially, while the law requires employers to pay at least 3% of staff salaries into their pension scheme, many choose to make larger contributions. 

Will employers pay less? 

Now, however, some will seek to save money by reducing their contributions to the 3% minimum. They must give 60 days’ notice of such changes, but will generally be within their rights to cut their payments. 

Moreover, for employers taking advantage of the government’s furloughing scheme, the Pensions Regulator is waiving the 60-day notice period altogether. Employers furloughing staff can claim the 3% minimum pension contribution from the government as part of the scheme, but will not be required to make any additional contribution to employees’ pensions.

The upshot is that many members of defined-contribution workplace pension schemes will have less money flowing into their savings plans. Since the benefits from such schemes are not guaranteed – unlike in a final-salary plan – this will mean a reduced pension on retirement. If you’re in a position to do so, it may make sense to increase your own pension contributions for a period to make good the shortfall.

Advertisement
Advertisement

Recommended

Companies cut back on their pensions bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019
Don’t be tempted to transfer out of your final salary pension scheme
Pensions

Don’t be tempted to transfer out of your final salary pension scheme

Switching out of final-salary schemes is very rarely a good idea, no matter how much money is on offer
29 Jul 2020
How to have a low-tax retirement in the sun
Pensions

How to have a low-tax retirement in the sun

Greece is to offer a ten-year tax incentive to foreign pensioners. That’s a pretty good offer, says Merryn Somerset Webb. But it might not last.
20 Jul 2020
This landmark pension case could mean big payouts
Pensions

This landmark pension case could mean big payouts

Defined-benefit members in bankrupt firms’ pension schemes could be due a payout after a landmark High Court judgment.
10 Jul 2020

Most Popular

BP has slashed its dividend – and markets love it
Income investing

BP has slashed its dividend – and markets love it

BP has bowed to the inevitable and cut its dividend in half – and its share price promptly rose. John Stepek explains what it means for shareholders …
4 Aug 2020
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020
Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020