Carillion collapse puts even more scrutiny on DB schemes

For one of Britaina��s largest construction companies Carilliona��s to go into imminent liquidation and a A?587m ($805m) Pension shortfall has put increased pressure on the UK Government to tackle the sustainability and address the future security of Defined Benefit (DB) schemes in an up-coming white paper, according to Pensions expert Greg Pogonowski.

Carillion is the latest company to struggle under the weight of Pension debt as DB Pensions have turned out to be far more expensive than most could ever have imagined. Factors such as significant increases in life expectancy mean that companies are now having to pay much more than originally anticipated to fund Pensions for their former employeea��s, decades after they finish work.

Pressure to deliver

The white paper is likely to contain proposals to give employers more flexibility to switch to less generous annual increases for Pensioners. I doubt this will be very popular with voters! The government may give companies the power to use a new measure of inflation or even allow schemes to suspend inflation indexation altogether. This would be likely to save money for businesses, while at the same time reducing Pensions for scheme members. Similar measures have been considered in the past but did not gain traction because the government was partly concerned about a backlash from millions of Pension holders.

Wake-up call

This is a a�?wake-up calla�? for Pension savers. The governmenta��s a�?Pensions lifeboata�?, the Pension Protection Fund (PPF), is now to take over payment of Pensions for the companya��s retirement scheme members. Whilst the PPF is an important and valuable support, UK final-salary Pension schemes have an enormous deficit black hole, which raises the inevitable question: how many more big hits can the PPF take?

Carillion has about 28,000 UK Pension scheme members. It will now fall into the PPF so about 12,000 Pensioners (who are already in payment) are largely safeguarded, for now. But for those not yet drawing a Pension things are less positive. They will get 90% of what they expected AND this is capped at A?38,505.61 per year for someone aged 65. Who wants a 10% a�?pay cuta�? just as they retire?

Potential Pension Transfer difficulties

There are currently more than 6,000 private sector DB schemes in the UK. About 880 schemes and 235,000 members have transferred to the PPF to date, with total claims amounting to around A?5.5bn. The government has predicted that another 600 schemes and around 150,000 members will transfer to the PPF by 2030.

It may be time for some scheme members to move out of DB schemes with the potential of high transfer valuations as schemes try desperately to get rid of liability? The Financial Conduct Authority (FCA) announced last week that it willA�on DB Pension transfers, as part of a probe into practices across the market. This could mean that people looking to transfer out of DB schemes may find it more difficult in future.

Yet another set of Pensioners (and future Pensioners) who have lost money. If you have an old Pension from a previous employer in the UK, maybe time to move it out before it is too late? Let me knowa��a��..