Final Salary Scheme

1,000 Final Salary Schemes in Trouble: How to Transfer Out of Your DB Pension

1,000 Final Salary Pension Schemes Unlikely to Pay Benefits in Full

The Pensions Institute, a UK research body, has warned that about 1,000 private-sector pension schemes, including 25 of the largest in the UK, were “highly unlikely” to pay their members’ pensions in full.

The UK Cass Pension Institute has issued a massive wake up call to administrators and members holding a final salary pension scheme.

Defined benefit schemes are based on flawed assumptions (due to waning population, wrong mortality rates used 20 years ago and better medicine) which assume that companies will be able to pay full benefits.

The Cass Institute published a guide which states that in the worst case scenario up to 1,000 final pension schemes could go under.

‘The Greatest Good for the Greatest Number’ is a discussion paper from Cass Business School’s Pensions Institute aimed at the trustees and sponsors of “stressed” DB schemes.

Professor David Blake, director of the institute and one of the authors, said the paper challenged the “rose-tinted” view private sector employers with DB schemes would survive long enough to pay benefits in full, an assumption on which UK government policy is predicated.

The “crushing reality”, however, is that many schemes are stressed and their trustees face “seemingly impossible conflicts of interests” between diverse stakeholders.

The Pension Protection Fund (PPF) would need to be altered to protect member interests rather than just their benefits. Early intervention by The Pension Regulator (TPR) and frequent automatic updates to the TPR when sponsors notice cracks in their ability to repay would be needed.

This may mean employees being paid less benefits to keep schemes alive. Final salary pensions are not only officially dead, but hundreds of the ones left are at risk of not meeting their benefits in full.

You can read the full paper by the Cass Institute here.

The Pensions Age also ran a story on it, stating that of the 1,000, only 600 schemes may receive PPF compensation as many sponsors are expected to become insolvent in the next five to 10 years.

It said the remaining 400 sponsoring employers might initially survive, but may eventually fail if they are not able to off-load their pension obligations.

Pensions with Liabilities Higher than Market Cap


As you see in the chart above, before 2008, most pension funds were well funded, but since the financial crisis and ultra low interest rates, pension fund deficits have ballooned.

Quantative Easing (QE) or “money printing” has not helped either. A flood of liquidity provided by central banks across the continent has reduced the yields on Government debt, pushing up pension deficits.

Six FTSE 100 companies have pension liabilities now larger than their equity market value:

  • Sainsbury’s (the supermarket)
  • International Airlines Group (IAG)
  • British Airways Pensions
  • BAE Systems Pensions
  • RSA Pension Scheme
  • Royal Bank of Scotland Pension Scheme
  • British Telecom (BT) Pension Scheme

You can read more here.

International Airlines Group, BAE Systems and RSA total disclosed pension liabilities are almost double their equity market value and British Telecom (BT), made the biggest deficit contribution of any FTSE 100 company over the past year, with a payment of £800m (net of ongoing costs).

There was also an article in FT, this December, “Retreat from ‘gold plated’ final pay pensions gathers pace”.

“Tesco, United Utilities and the Royal Mail are just a few more major employers recently looking to close the doors of their DB schemes to all employees for future benefit accrual.”

How to Transfer Out of a UK Final Salary Pension Scheme

The Pension Protection Fund (PPF) is supposed to be the lifeboat to save you, but if your final salary scheme becomes insolvent, it won’t have PPF protection.

How Can I Protect Myself from Final Salary Scheme Closures?

Be pro-active. You can transfer your pension out of a final salary pension into a UK SIPP if you still live in the UK.

If you are moving offshore to retire or live offshore already, a transfer to a Recognised Overseas Pension Scheme (ROPS), formerly known as QROPS, will not only get you out of the DB scheme, but also get your pension out of the UK tax net and into the currency & investments of your choice.

Please contact us to find out more about your options.

1,000 Final Salary Schemes in Trouble: How to Transfer Out of Your DB Pension by

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