Millions of retirement savers are trapped in a ‘zombie’ workplace pensions that could pay less than promised.
The BHS pension debacle has focussed attention on hundreds of other schemes which former Pensions Minister Steve Webb claims have no realistic chance of keeping their income promises to savers.
He was giving evidence to a House of Commons Select Committee inquiry examining the collapse of BHS.
The high street retailer has a pension scheme with 20,000 members that has a £571 million black hole.
The government’s pension rescue agency, the Pension Protection Fund (PPF), is safeguarding the savings held in the failed business, but thousands of members will receive at least 10% less retirement income than they expected.
Why workplace pensions are underfunded
PPF CEO Alan Rubenstein explained to MPs that up to a thousand of 5,000 workplace pension funds were at ‘serious risk’ because of huge deficits.
Businesses are struggling to manage defined benefit pensions, also called final salary pensions.
Two main issues are causing the problems –
- Retired workers are living longer and the amount they paid into their pension funds is often less than they take because the contribution calculations did not take this into account
- Low interest rates and returns on investment have seen funds are not making as much money as projected
“More money is going out that planned and the fund is not replenishing at the expected rate,” Webb told the inquiry.
“Even companies which are topping up their schemes are finding they cannot keep up with the payments.”
Take charge of your retirement cash
Webb put forward options for resolving the crisis –
- Do nothing and hope inflation and higher interest rates in the future will cure the problem
- Cut pensions savers have already paid for
- Let funds take more risks on investments to generate more cash
Some zombie pension savers have another option.
Expats can take charge of their own pension funds and rescue them from a nightmare of reduced payments that fritter away benefits by switching to an offshore Qualifying Recognised Overseas Pension Scheme (QROPS).
One argument against transferring to a QROPS from a defined benefit scheme is that the loss of benefits would not be cost-effective.
However, if the scheme is heading for the PPF, the pension loses benefits anyway, so a review to see how cost-effective a switch to a QROPS might be is worthwhile.
But picking the right time is important. Once the PPF is involved, transfers are frozen and they are not allowed once the pension is rescued.
