Money in the bank: Final salary plans have given employees a decent pension
The last of the country’s luxury defined benefit plans will likely be gobbled up by a small group of insurers in the next decade. But experts believe those on benefits tied to these schemes shouldn’t panic.
These occupational pension plans, a remarkable innovation of the 20th century, have provided millions of employees with a decent pension upon retirement.
They promised a pension based on an employee’s salary and seniority, and have been described by Sir Stephen Timms, Labor MP and Chairman of the Work and Pensions Select Committee, as ‘one of the best things our country has ever done. done’.
But due to rising costs (for employers who provide them) and tighter regulation, four million people in the UK’s 5,000 remaining schemes could find their employer will no longer pay their pension.
Instead, an insurance company will take over – household names such as Aviva, Canada Life, Legal & General and Scottish Widows. According to pension advisor Hymans Robertson, about 1.4 million individual pensions have already been taken out by insurers.
Verity Hastie, risk transfer specialist at Hymans, says: “From the moment an insurer assumes the obligation to pay the benefits of a plan, they need to have sufficient capital to ensure they receive all promised pensions. able to pay out, even under stressful circumstances.’
She adds: “Insurers are minimally capitalized to withstand a catastrophic event that occurs once every 200 years, such as a stock market collapse. Most hold reserves significantly in excess of this requirement.”
CHRISTOPHER Stiles, of law firm Gowling WLG, says: ‘If a pension purchase by an insurer goes well, and most do, participants’ rights will not change.
What changes is who is responsible for providing those rights – an insurer instead of pension fund managers – what assets are behind them and how it is all regulated.’
Participants in an employer scheme transferring to an insurer must ensure that their contact details are up to date.
The insurer also asks for supporting documents, such as marriage certificates, bank statements and proof of cohabitation, before paying out the partner’s or survivor’s pension.
While an insurer will not waive pensions promised under the old employer-sponsored scheme, not everything will be the same.
For example, benefits for participants – such as lunches for retirees, access to financial education and advice – could be lost. But more importantly, participants lose any chance of better benefits than promised, for example through discretionary pension increases.
Research by pension advisor Willis Towers Watson shows that only 10 percent of plans will award discretionary increases in 2022, but six in 10 trustees are considering doing so.
This has become more of a current issue with double-digit inflation and many pension plans limiting annual increases to a maximum of 5 percent.
A pension scheme that has been taken over by an insurer offers participants more certainty in terms of protection. The Financial Services Compensation Scheme offers policyholders a lifeboat in case an insurer goes bankrupt. This currently covers 100 percent of pension benefits.
In comparison, the equivalent lifeboat arrangement in the defined pension landscape is the Pension Protection Fund. It usually leads to member benefits being compromised.
Insurers take over defined benefit plans to make a profit. The more excess assets a plan has to meet future obligations of income-receiving members, the more likely it is to be picked up by an insurer. Henry Tapper, founder of pension company AgeWage, says: ‘If an employer’s ability to meet further cash calls from pension funds is compromised, a buyout by an insurer is likely to be good news.
“Unfortunately, weakly sponsored schemes are usually weakly funded and in a buyer’s market weak schemes are unlikely to be bought out.”
Tapper is also concerned about the “concentration risk” of such a small pool of insurers willing to assume the obligations of pension plans. He warns, “The failure of just one of these insurers could do much more damage than Maxwell or Equitable Life ever did.”
Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, agrees. He says: “There may be future systemic concentration risks that the Bank of England and the Prudential Regulation Authority (PRA) need to consider.
“However, the current regulatory regime and the solvency standards required of insurers are robust and provide pension participants with a high level of protection.”
The PRA is currently conducting a ‘thematic review’ of insurers involved in purchasing pension schemes. But systemic failure is a long way off.
Most people will find their retirement prospects improve when they move to an insurer.
Chris Rice of Broadstone consultancy says, “The member no longer has to worry about the financial health of the sponsoring employer.”
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