With the high profile collapse of Carillion, people are, quite rightly, asking about the safety of their pensions. So, let me try and set the record straight and, hopefully in the process, ease some concerns.
The media frenzy has centred on the deficit in the Carillion schemes and the generally accepted figure is now very close to £1 billion. By no means an insignificant figure but it is no more than an estimate of the difference between the assets of the Carillion scheme and what is expected to be paid out over the next 50, 60, 70+ years (the US Civil War finished in 1865 but Civil War pensions were still being paid by the US Government to participants’ dependants as late as 2013).
What is far more important is what happens to the pensions of the employees and ex-employees of Carillion. And, as is common across the industry, it depends on the type of pension you have – defined benefit or defined contribution.
Defined Benefit (DB)
More commonly known as final salary, salary related or CARE (career average salary related) schemes, DB schemes promise to pay a level of benefit at a particular age which is, in some way, related to the salary you earned while working. It may be the salary in your final year of work, an average over the last 10 years or even an average over your working life.
If the employer goes bust, the pension scheme is assessed to see if it needs to be taken over by the Pension Protection Fund (PPF), the pensions “lifeboat”. If the scheme can meet its liabilities, it will carry on functioning as normal. If it cannot, the PPF will take on the assets of the scheme and also the payment of pensions.
People who have passed the pension scheme’s normal retirement age and already retired will continue to receive the same monetary amount as they were, although future increases may not be as generous.
People who have early retired or are yet to retire will receive 90% of what they would have got from the scheme, subject to a maximum amount. For most people, this maximum amount will be £34,655 a year but can be higher for long serving employees. Again, future increases may not be as generous as the rules of the original pension scheme.
The PPF itself is funded by a combination of levies on pension schemes and the taking on of the assets of the pension schemes whose employers have failed. Current estimates are that the PPF has a surplus of more than £6 billion (source: FT Adviser January 2018).
Defined Contribution (DC)
By far the most common type of pension now, DC schemes, also known as Workplace pensions and Group Personal Pensions, are where the amounts contributed are defined but the benefits are not. For example, ABC Ltd. runs a DC scheme where the employer will match the employee contribution up to 8% of basic salary.
These are, in almost all cases, set up using a third-party specialist provider. The provider could be a household name like Standard Life or Legal & General, or it could be someone more obscure like Now Pensions or NEST.
Whoever the provider is, the legal structure is that the money once paid into the scheme is held in trust for the benefit of the members. In other words, each employee has their own account which is accessible only by them or their nominated beneficiaries.
And whether the scheme is DB or DC, the money held in it will never be part of the assets of the employer, so can never be used to pay the debts the employer may have run up in their path to oblivion.
So, in a few words, pensions are safe.
The fall out of Carillion and the potential failure of future companies will, undoubtedly, cause serious concerns for many people. But those concerns should not be based on the unfounded assumption that failure of their employer will see their pension wiped out too.
If you or your employees would like further reassurance, please do not hesitate to contact us on 0333 241 3350.
Peter Murphy Dip PFS
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case