The £210bn Two-Thirds Pensions Time Bomb: Worrying Times Ahead for Retirees

Types of Pension Plans

The retirement plans of millions of workers in the UK are going into turmoil because of the existing deficits in two-thirds of the pensions schemes. Of the 5,588 pension schemes that the Pension Protection Fund (PPF) monitors, there exists deficits in 3,710 of these schemes.

This report by the PPF at the end of 2017, further reveals that this number represents 66.4% of the total pension schemes funds. To put things into perspective, this is a whopping 2/3rd of the schemes here in the UK.

Some of the biggest deficits are in BT, Royal Dutch Shell, BP, TESCO & BAE Systems with deficits over £6bn.

Such figures, compounded by the collapse of Carillion and British Home Stores, have further fueled the uncertainties surrounding pensions provided by the private sector in the UK.

In fact, according to PPF, the 3,710 schemes have a combined shortfall amounting to £210 billion, a figure which will be quite hard to correct.

The only probable lifeline for the members of these pensions schemes is the Pension Protection Fund (PPF), which is mandated to provide a lifeline for pension savers in case their provisions go into insolvency.

This stop-gap measure, is however, inadequate in a way, as it only pays up to 90% of the total amount that your pension was worth.

Amid all these uncertainties, there seems to be no solution in sight. According to Sir Steve Webb, a former Pensions minister, more savers should be prepared to have their fates lie with the PPF, as many retirement pots will go into disarray, after the Carillion company recently failed.

In addition, he added, it is only a matter of when, and not if, there will be another Carillion case. “With two-thirds of schemes in deficit, it is inevitable there will be more insolvencies and more schemes ending up in the PPF.”

As a solution, Sir Steve feels that companies should prioritise pension funds over the payment of dividends. Consequently, those companies will be able to plug the holes in their pension deficits.

An analysis done by Jardine Lloyd Thompson (JLT) consultancy found that FTSE100 companies paid more dividends than their combined pension deficits (£71.2 billion compared to £43 billion respectively).

This analysis also reveals that a year’s worth of dividends could have solved the deficits issue of 41 of the FTSE100 firms. Of these firms, the biggest deficits in pensions are those of B.T. (£9.1 billion), Royal Dutch Shell (£6.9 billion), B.P. (£6.7 billion) and Tesco & B.A.E. (£6.6 billion).

In conclusion, Charles Cowling, a JLT Employee Benefits Director, had this to say: “The demise of defined benefits pensions is saddening to witness in the private sector, as they have become too expensive to sustain as a benefit for employees.”