BHS and Tata Steel pensions crises should act as a wake-up call for savers
The BHS and Tata Steel pensions crises should act as a stark wake-up call for the 50 per cent of individuals with final salary pensions, who are complacent to the alarming risks that burgeoning deficits pose to their retirement funds.
As we’ve seen all over the news, BHS is the latest major British firm to collapse with massive pension burdens. As such, MPs are due to grill BHS owner for 15 years, Sir Philip Green next week regarding the situation.
In addition, a possible legal challenge is looming to the unprecedented move from the RPI inflation index to the lower CPI measure for Tata Steel members’ future pension increases.
The greatly publicised troubles encompassing the BHS and Tata Steel pensions should, therefore, set off a warning signal to people with UK defined benefit pension schemes.
Looking at the Tata Steel example, this emphasises what we’ve been hammering home for some time: that a large number of the laws surrounding DB pension providers are archaic, and fall well short of an acceptable standard. As is, they are not at all relevant in today’s world.
However, regrettably, the myth that final salary schemes are guaranteed is alive and kicking.
Over 50 per cent of new or potential clients don’t fully appreciate how the pension deficit crisis could result in life-shattering financial consequences for their retirement.
It is very much a reality that many final salary schemes are on the edge of an abyss. This is because many firms cannot afford to uphold these expensive schemes with defined-benefits retirement packages that have pensions linked to their earnings and employment.
Put simply, there’s insufficient cash in their pension pots to meet future obligations. Too many schemes have now become untenable.
Furthermore, it is highly improbable that there will be a colossal step forward away from the abyss for a high number of these schemes.
Indeed, there is the Pension Protection Fund, the State-backed rescue fund – but this is not guaranteed by the government, and the level of benefits payable by the PPF are typically far lower than what savers would expect to get from their company’s scheme.
In addition, it is firms’ responsibility to fund the PPF, thereby piling more pressure on their own scheme.
Consequently, as the pensions black hole increases further, as shown most recently by the BHS and Tata Steel cases, those with final salary schemes should seek independent financial advice on how they might be able to mitigate the risks that their scheme could face.
Of course, there are, typically, things that can be done, but I would strongly advise individuals to review their retirement planning as soon as possible.
After all, it’s far better to get the difficult questions out of the way now, than be forced to scale down retirement ambitions down the line.