These are nervous times for final salary pension scheme members and trustees alike.
The spectre of high profile pension deficit crises looms large, with the British Steel Pension Scheme (BSPS) and Carillion episodes still fresh in our minds.
But we’re also on the precipice of change, with new legislation incoming and measures proposed that could help to prevent history repeating itself.
The full extent of these changes is yet to be established but it seems a good point to take stock of where we are now and what lessons have been learned.
Certainly, members of final salary pension schemes face a squeeze.
Those fortunate enough to have a final salary or defined benefit pension entitlement, may find themselves in a scheme with a large pension deficit, such that it now faces very difficult ongoing funding decisions to ensure that it meets obligations to members.
Things are moving in the right direction but there’s only so much legislation can do and even that takes time to implement.This was the case with the BSPS and there are many household name companies now facing deficits and trying to fill in the ‘pensions black hole’.
A recent report by Mercer has established that the combined deficits in FTSE 350 companies was £76bn at December 2017.
We would perhaps be naïve to assume that the BSPS is an isolated incident - the extent of the deficits in existing schemes would suggest there will others that will face equally difficult decisions - but even where a business has a plan in place to deal with the a deficit situation and is able to follow it through, they may not be able to prevent a significant number of members falling victim to pension scammers.
With the BSPS scenario, we also saw 25,000 members, for whatever reason, do nothing when asked to decide where they preferred their savings to go; arguably resulting in a less secure outcome for them than for those 83,000 individuals who actively took the decision to move into the BSPS II.
There has been a deluge of political and regulatory fallout resulting from the BSPS issues and the pensions deficit scandals that preceded it and, finally, the government seems willing to legislate to help mitigate against future risk.
News that the ban on pensions cold calling is being brought forward to this June is welcome.
As is the tabling of an additional amendment to the Financial Guidance and Claims Bill that will require schemes to make sure any customer wanting to access or transfer their pensions savings is “referred to appropriate pensions guidance”, and “has either received appropriate pensions guidance or has opted out of receiving such guidance”.
The hope is that this guidance will, ultimately, be sourced from the single new financial guidance body that will come as a result of merging The Pensions Advisory Service, Pension Wise and the Money Advice Service.
The government has drawn the line, however, at introducing a system of deemed consent, which would allow trustees to transfer members without consent in order to ensure they received better benefits than they would in the Pension Protection Fund (PPF).
To give an example of how this might work in practice, deemed consent would have enabled trustees to enrol the 25,000 BSPS members who were moved automatically to the PPF when they didn’t decide what to do with their savings, into the new BSPS.
Things are moving in the right direction but there’s only so much legislation can do and even that takes time to implement. In the meantime, the entire pensions industry has a role to play in helping to inform and protect savers.
Pensions must take a more mainstream and less esoteric position in our everyday life.Firstly, members need to be protected from the prospect of schemes becoming unsustainable - this needs clear strategic input and advice at the scheme and trustee level, to ensure that appropriate investment decisions are taken.
It also requires employers to accept that the competing pressures to declare dividends should not impact adversely on the pension rights of its members.
The provision of helpful information to members is also essential.
Yes, to some extent, trustees’ hands are tied when it comes to questionable decisions, as members have a statutory right to transfer their fund value from a scheme into a personal plan. But that should not negate the need for them to make members fully aware of their options, to provide as much impartial information as possible and signpost savers towards proven independent advice bodies.
Cutting out the jargon will help too. It’s imperative that members are given the facts in a clear and concise form.
Deciding what to do with your lifetime pension’s savings can be a formidable prospect and anything that can be done to make it seem less daunting will, undoubtedly, help to tackle the inertia we have seen when people are forced to grapple with very complex decisions in a short space of time.
Finally, pensions must take a more mainstream and less esoteric position in our everyday life.
Leaving decisions about pensions until the time of retirement is too late.
Matthew Howarth is a partner at Shoosmiths
