It seems to be going from bad to worse for the UK pension deficit. Across the 6,000 private sector defined benefit scheme pensions, 5,000 are now in deficit with roughly 1,000 close to insolvency, according to the Financial times. Pension schemes that go into liquidation will end up in the ‘Pension Protection Fund (PPF)’. Information regarding any UK Defined Benefit Scheme can be found on their website at http://www.pensionprotectionfund.org.uk/. The current UK pension deficit stands at £375 billion, £85bn larger since the Brexit vote.
Pension Protection Fund (PPF)
The PPF was created 12 years ago as an insurance policy for anyone with a Defined Benefit Scheme. It provides compensation when there is a qualifying insolvency event i.e. when there are insufficient assets to cover liabilities. The protection is as follows
- Up to 90% of the pension fund value with a cap of £37,420 per year.
- Benefits rise in line with inflation with a cap of 2.5% per year.
- Survivors Pensions subject to the rules of your DB schemes.
It’s important to note that the PPF isn’t backed by the treasury. In fact, it is funded by levies from Defined Benefit Schemes which consists of a flat rate from all schemes as well as a risk based levy which requires a higher levy for companies with a higher underfunding deficit. Many argue this could have inverse affects as growth could be subdued by higher levies in times of economic hardship. Seeing as the UK pension deficit is 160 times larger than the PPF surplus, many are concerned the stability and longevity of the PPF.
How has this affected the UK?
Many UK schemes have already fallen into the PPF with the most major recent one being BHS in April this year worth £571m. Bloomberg have compiled the following chart outlining the best and worst 5 companies:
As you can see, the deficit is hugely different depending on the sector and company. It would be advisable to seek independent financial advice to decide whether your scheme is at risk of defaulting along with what options you currently have.