Another one bites the dust: how safe can a pension be?
Millions of people save via company and personal pension schemes. But levels of protection vary, reports Sam Brodbeck
The collapse of yet another pension company last week has thrown the security of Britain’s pension system back into the spotlight. Administrators appointed to find a buyer for The Lifetime Sipp Company’s pension assets have urged investors with funds at the failed firm to contact financial advisers.
The Lifetime Sipp Company is one of hundreds of small firms offering self-invested personal pensions (Sipps). These allow investors to put their cash into a far wider range of assets than is allowed through schemes operated by employers.
Yet stricter retrospective rules over how much providers must hold in reserve against so-called “non-standard” assets, such as property and unlisted shares, have pushed some firms to the brink.
Savers into other types of pension schemes are also wary, following the high-profile collapse of BHS and Carillion and the British Steel scandal, in which rogue advisers convinced workers to give up gold-plated pensions.
Despite new protections, the memory of Robert Maxwell’s plundering of the Daily Mirror pension fund a quarter of a century ago colours many people’s view of the safety of pension savings.
Martin Tilley, of Dentons, the pension firm, said: “Everything coming out at the moment is bad news. Some people will be panicking and what type of pension they have determines what they need to worry about.” The vast majority of money saved into pensions is built up through employers, who in most cases match or exceed the contributions made by individual savers.
In the past, most company schemes operated on a “final salary” or “defined benefit” basis. That means income in retirement is based on wage and length of service – and must be increased by inflation to ensure pensioners can keep up with the rising cost of living.
Vital tax credits slashed by Tony Blair’s government, the financial crisis and rising longevity forced almost all schemes run by private sector firms to close to new members. Despite closures, more than 10 million people still rely on the income from these schemes to fund their retirement.
As a result of the Maxwell scandal, the Government introduced a raft of reforms, leading to the establishment of the Pension Protection Fund in 2005. This lifeboat fund scoops up members of schemes where the sponsoring company has gone bust.
If your scheme falls into the PPF and you are already retired, your pension will be paid at exactly the same level. If you are yet to retire, payments are capped at 90pc of the promised rate.
However, high earners who are not yet retired face substantially bigger losses. There is also an overall cap on compensation, currently £39,006 for a 65-year-old, or £35,106 where the 90pc cap applies. Savers with long service get special protection: the cap is increased by 3pc for each full year of service above 20 years, up to a maximum of double the usual cap.
Last year, the Pension and Lifetime Savings Association, the trade association for this type of pension, warned that more than three million savers in the weakest schemes only have a “50/50” chance of receiving the full value of the pensions. While the PPF’s own investments more than match its liabilities at the moment, experts fear it could have to cut compensation in the future if it were forced to take on the schemes of several large employers at once.
Today’s workers are far more likely to be relying on savings from