With our pensions, we’re often told that big businesses present less of an investment risk. They’re successful and have plenty of backers, which can point to a safer option for cautious investors. But what happens when big companies collapse?
After financial troubles plagued the company, construction giant Carillion went into liquidation in early 2018. Causing uncertainty for around 28,000 members of the group’s 13 pensions schemes. This week, we’re looking at the ramifications of a major business collapsing and the value of their final salary Scheme.
Carillion PLC collapsed with £2 billion of debts. As a major construction company, this is affecting both previous and current workers. Carillion’s financial ruin has led to uncertainty for many. Carillion’s pension schemes had a combined £2.6 billion buyout deficit upon its collapse on 15 January, according to an analysis for Sky News.
Who is affected?
The Carillion group has a wide range of pension commitments. According to figures reported by the Financial Times, its 13 pension schemes in the UK have 27,500 members. Of these, around 13,000 are pensioners, 14,000 have not yet claimed their pension or were “deferred” and 500 are actively saving into a pension plan.
The Pension Protection Fund (PPF)
Following the fall of Carillion, the future of all these pensions was left uncertain. As it stands, 5,900 pensions are being assessed by the Pension Protection Fund (PPF). These pensioners will receive compensation levels from the day the liquidation was registered. With PPT known as the financial “lifeboat” helping to save some of their pensions, investors in Carillion’s schemes are still likely to lose out. The downside of this fund is that those who have yet to draw a pension will see their eventual income cut by at least 10%. Those who are already drawing their pension will likely have their income maintained, but will probably lose some valuable index-linking. This means that their income will no longer be affected by the cost-of-living index and won’t rise accordingly. Only part of their pension earned after 1997 will rise with inflation.
As well as this, people who are yet to retire will see their pensions face Government imposed cap. Although they will still receive 90% of the saved money, the annual cap for the amount they receive stands at £38,505.61. this is even lower if you retire early. Compensation is still paid out to your family after your death, with this depending on the rules of your old pension scheme.
With the PPF, members of the Carillion pension schemes can be reassured that they are protected from losing all their investment. It’s worth checking of your pension scheme is similarly covered should the worst happen. Insurance and assurance on your pension can give you peace of mind heading towards your retirement.
What is a final salary scheme?
The final salary defined benefit schemes provide a set level of pension at retirement. It is based on a proportion of your final salary, with other factors being considered, such as length of your membership in the scheme. Most of these schemes have been closed over recent years, but are still offered by some, mainly larger employers. This is a scheme used by Carillion.
Should you move out of your final salary scheme?
Rare events like Carillion’s collapse do happen, which is why you should build a diversified range of investments in your pension. If you are concerned that you could lose out if your company goes bust, you can consider moving out of your defined benefits pension plan. This offers both benefits and detriments that must be carefully weighed up.
Looking positively at leaving your scheme, there are several potential benefits. You may be able to access a larger tax-free lump sum through leaving; the amounts are more controlled within the scheme. This is because the defined benefits are inflexible. If you are ill or have a lower health expectancy, your transfer value should be higher if you leave. Most importantly, as Carillion shows, if you are concerned about your employer’s financial strength, leaving may be for you.
On the other hand, defined benefit pension plans have undeniable advantages. This gives you a clear idea of what your retirement income will be and you can be sure it won’t fall. This is useful for planning ahead. The figure will also rise with inflation. As benefits are inflexible, the burden of managing your pension is removed and you’ll be sure that your money will last. Likewise, you can be sure your spouse is provided for if you die before them, so they will then receive a pension from the scheme.
These pension schemes offer both advantages and disadvantages, which should all be carefully considered. Big company pensions are not the unwaveringly safe option they were once viewed as and should attract a degree of caution. If you’re worried about the future of your pension, it’s worth evaluating your final salary scheme. Talking to a professional financial advisor can help you make a better decision for your situation.