DO YOU really want to lend your retirement savings to your employer? For executives, the pensions playing field has just changed dramatically. Historically, executives have benefited most from generous final salary pension schemes, due, typically, to above-average pay rises. Final salary pension schemes have been very successful in retaining key talent. Sometimes too strong — turnover at senior level has been, for some companies, unhealthily low. But all that may be about to change.
Many UK pension schemes are in a perilous position. Mercer estimates that the current aggregate deficit of UK pension schemes measured on a solvency basis (based on the cost of buying the promised benefits from an insurance company) is more than £300 billion. The advent of the Pension Protection Fund (PPF) promises additional security for pension scheme members — but how much? If a pension scheme ends up claiming on the PPF after a company failure, the majority of employees will likely receive most of their pension. But for those below normal retirement age there is a cap of £25,000 on the maximum pension the PPF will pay. This new cap applies even for those who have taken early retirement and are in receipt of a pension (previously nearly all pensioners could be sure that their benefits were fully secure — but no longer).
So, whilst the PPF represents a much-needed safety net for many employees, for executives with large accrued pension benefits it could seem weak and inadequate. Indeed, a scheme ending up in the PPF could be a financial disaster for executives. For example, a senior manager, aged 59, who has just taken early retirement with a pension of £50,000 would lose half his pension — a loss worth over £600,000.
Even if a scheme avoids the PPF, pensions in excess of £25,000 will be at the back of the queue when it comes to dividing up the fund. So if schemes fund to the levels the new Pensions Regulator is seeking, executives are still only likely to get a few pence in the pound (of the excess over £25,000) if the company folds.
Under the new pensions regime, deficits are loan capital from the scheme to the company. This has been emphasised by the Pensions Regulator, who recently encouraged trustees to take the view that “a pension scheme in deficit should be treated in the same way as any other material unsecured creditor”.
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What this means is that many companies are being financed by huge personal loans from executives. This raises a number of questions for senior management: