How safe is your final-salary pension?
The severity of the recession is making people wonder how safe their pension is if their sponsor could go bust or cannot fund contributions. The feedback loop between pension solvency and corporate solvency, where the chance of failure is magnified by rules written to protect them from failure, is particularly unfortunate. It makes this look like another systematic problem that only the Government has deep enough pockets to solve.
Protecting pension promises made by company pension funds when they fail does not work like protecting depositors in failed banks, who have so far escaped becoming general creditors. With private pensions, we know there will be a haircut. The rules are clear. The Pension Protection Fund will pay out 90% of accrued pension rights to members pre-retirement age, will weaken the inflation protection and will cap payments at below £30,000 pa. If the fund could pay benefits better than this by laying off the liability with an insurance company, they must take this route and the haircut will be less. These impacts ignore the loss of further accruals, as if members will have alternative income sources from which to make provision. Clearly the people with most to lose have large accruals, are late in their career and still working for the company when it failed.
This is the sort of small risk with massive consequences that people normally avoid, insure or diversify. Savers with personal pensions do not have the same risk but instead have to provide against extreme investment outcomes. This has a bearing on much of what I write about here and I will return to it.