11 million workers are in jeopardy of losing substantial portions of their pensions upon retirement. The latest figures from the British Government show that the funding shortfall for companies operating final salary schemes, is close to £1 trillion pounds. The final salary scheme promises each worker a set amount upon retirement, based on their years of service and current wage. This “guaranteed” pension is proving problematic, given the current state of the economy. Returns on investments have been low, and contributions by the companies involved have been lacking.
The end result of this might be pensioners going under the umbrella of the Pension Protection Fund (PPF), which takes over when schemes are unable to pay what they promised. The pay-out will be less than what was promised by the schemes, and in this case, significantly less. Hymans Robertson estimate that the current figure due pensioners is £935 billion. This is more than double what the PPF can offer, which is £383 billion.
Of the 6,000 final salary schemes, 5,000 are short of their target. Companies can be required to fulfil their obligation at all costs, but this might raise other issues. Given the magnitude of these sums, companies can become insolvent if forced to do this. The Work & Pension Committee of MPs will be having a review of the system to find a better and lasting solution. Different groups are advocating for various solutions, including an agreement between pensioners and companies for a figure lower than promised but higher than the PPF. Public pension schemes have already been amended to create a more realistic scheme that pays out a sum mirroring the inflation rate. The MPs will decide if it would be possible for the private sector to change to this agreement and how quickly it can take effect.