FTSE giants now trying to trick workers out of their pensions
THEY were the pension sweeteners once dubbed ‘plasma TV deals’ because when offered the chance of getting a large cash lump sum from their nest egg, savers would rush out and spend it on the latest gadget.
But these deals were subject to a crackdown when regulators realised that the seemingly lucrative offers were actually a way for companies to lure workers in to giving up valuable final salary pensions and into risky stock market-linked alternatives.
Now it seems pension experts are worried that similar controversial deals are making a comeback as firms look to cope with the new funding crisis in final salary pensions.
The crisis of the BHS pension has been the most high profile scheme to suffer from a sinking black hole, which an employer has struggled to finance. But even its £571m deficit is a drop in the ocean compared with some firms. And with gilt yields – which are used to fund pension schemes – plunging to new negative lows because of the latest round of Bank of England money printing, deficits are soaring.
According to one firm, they have reached a whopping £954bn, an increase of £100bn in just the past month. Separate figures from lifeboat scheme, the Pension Protection Fund, show the number of pension schemes with black holes soared by 131 to 4,995 in the month between May and June. Their combined deficit ballooned by £84bn to £416.3bn, up from £332bn, over the same period. Consultants say they are being deluged by requests from employers struggling with the eye-watering costs of Britain’s final salary schemes and who want a way out.
Together they are devising a host of clever tactics to tempt the 15m workers who still have private final salary pensions to give up their perks and make huge cost savings for their employers. Danny Cox, chartered financial planner at investment firm Hargreaves Lansdown, said: ‘The cost of running these pension schemes is soaring, especially following the Bank of England base rate cut. Firms are looking for ways of cutting back their costs, some are looking at ways of encouraging savers to go elsewhere.’
TRICK 1: The generous cash handout
WORKERS in private final salary schemes are being tempted by employers with the chance to take the value of their pension in cash.
So desperate are companies to cut back on their pension promises to savers that financial advisers say some firms are promising workers unbelievable sums.
These deals are even more tempting than in the past because under new pension freedoms savers are allowed to take their payouts in cash. Previously they would have to take an annuity, which pays an income for life.
Even relatively junior employees are being offered huge amounts. In one case seen by advisers Tilney Bestinvest a worker was offered £116,000 in exchange for a £3,800a-year pension.
Other workers are having the prospect of becoming an instant millionaire dangled before them. A 64-year-old with a £25,000-a-year pension was offered a £1.3m lump sum by his employer, according to advisers Punter Southall.
Jerry McLoughlin, principal at advisers Punter Southall, says: ‘Some schemes are being very generous because they are trying to reduce their liabilities.’
In a limited range cases, for instance if you don’t have children or are in poor health, taking a lump sum could be a good idea. But generally you are giving up a guaranteed income and an array of other perks, such as inflationlinked increases and payouts to your spouse once you have gone.
Experts warn that some less scrupulous firms are offering customers shoddy deals to dupe them into giving up their perks. In some cases they are being handed deals hundreds of thousands of pounds lower than they should be.
TRICK 2: A bigger cash handout at the start
EXPERTS say this is one of the newest tactics to have been dreamt up by actuaries. Workers approaching retirement are sent a letter offering the chance to boost their pension by anything up to 20pc – they get this in the form of a oneoff payment.
But in exchange for this extra cash the worker gives up a chunk of their future pension payouts, as well as guaranteed inflation-linked increases.
These deals, dubbed Flexible Retirement Options, look tempting, but over time this could cost someone thousands of pounds, particularly if they live for many years after retirement and the annual pension income increases are around 5pc.
If this is the case, the extra cash they get could be outweighed by the income they’ve missed out on in the future. While savers lose out, the employer can shave hundreds of millions of pounds off the cost of providing these deals.
TRICK 3: A larger income to start with
IT IS not just workers and those coming up to retirement who are being targeted by employers desperate to slash their pension costs.
Actuaries say that retirees who have been taking their pensions for years are increasingly being sent letters by their former employers. They are offered deals, known as a Pension Increase Exchange, which offer a one-off boost to their pension of between 10pc and 40pc – depending on how long the saver is likely to live.
In exchange for getting a bigger income now, they give up annual inflation-linked increases to their payouts, which can be as high as 5pc and their pension remains frozen. This might not be a problem for the first few years, but if a saver lives a long time they could miss out on huge amounts.
However, this could be a good deal if you believe you are unlikely to live long and need cash now.
TRICK 4: Changing cost of living increases
LAWYERS are poring through the small print of pension contracts trying to dig out loopholes that could allow firms to slash annual cost of living increases. Promises to increase pensions with inflation can be particularly expensive to schemes because the gains multiply over time.
So, if they discover there is any room for manoeuvre – if a contract is unclear – it can allow the firm to reduce the increases to a less generous measure of inflation. This can mean a swap to the traditionally lower consumer prices index (CPI) which is the Government’s preferred measure for pensions, from the higher retail price index (RPI).
Firms who want to change the terms of contracts must go through the courts to do so. But as the Daily Mail revealed last month, the Department for Work and Pensions has been exploring introducing new legislation that would make this easier. It is one of the changes they are hoping to implement for the British Steel Pension Fund which is £700m in deficit.
If implemented it could give firms the green light to cut savers’ deals. According to figures from investment firm Hargreaves Lansdown, a saver with a final salary pension worth £10,000 a year – could lose £104,000 over a 25-year retirement through a switch from RPI to CPI.
And pension companies are lobbying for employers to be allowed to make other changes than these. So don’t be shocked if you find companies finding ways to cut back on perks such as pensions for spouses or children after the pensioners has passed away.