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Top academic: 'There is a real and current threat to your pension'

Nearly two million members of final salary schemes are at risk of seeing their pensions cut, according to Professor David Blake - Getty Images
Nearly two million members of final salary schemes are at risk of seeing their pensions cut, according to Professor David Blake - Getty Images

There are 10 million people in 6,000 “defined benefit” pension schemes in Britain. Most of them will get the pensions they expect in full – but not all.

If the companies behind these schemes are financially strong enough still to be in business when the pensions come to get paid, then all is well. However, around 1,000 schemes, possibly with as many as 1.7 million members, are in a very precarious position with financially weak companies behind them or large deficits - sometimes both.

Their members face a real and current risk that their companies will go bust. If this happens their scheme will almost certainly fall into the Pension Protection Fund (PPF). This will ensure that they still get a pension, but it will be lower, at around 90pc of what they were expecting.

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Those with larger pensions may get even less, as there is an overall cap on the compensation the PPF will pay, currently £34,655 a year, although it can be higher for those with long service.

Perhaps surprisingly, the identities of the schemes that could be in difficulty are not publicly disclosed.

It is however sometimes possible to spot them because they are backed by what are known as “zombie” companies. These firms just about manage to cover their current pension payments, but leave little or no cash for investment in the business.

Minister softens up 11 million workers for pensions blow
Minister softens up 11 million workers for pensions blow

Listed zombie companies tend to have a large pension scheme deficit relative to their stock market value. If they have managed to raise any debt or equity finance over the previous five years, this money will have been used to keep the company afloat, rather than funding the pension scheme.  

In the case of private, smaller companies, what we sometimes see is the key directors trying to keep the company afloat until they themselves reach retirement, so that if the company goes bust after that they will get their full pension from the PPF.

Certain sectors are a more natural hotbed for "zombies". Manufacturers, for example, may continue to make products that have been rendered obsolete by newer technology because they don’t have enough capital to change their business model.

In other instances, the business may make products or provide services that remain attractive to its target market, but may be unable to raise capital because the pension scheme deficit deters new investors.

Under these circumstances, members can ask the scheme’s trustees to press the company to put more funding into the scheme. Alternatively, they can prompt the trustees to seek a compromise proposal with the company, known as a “regulated apportionment agreement”, under which benefits are reduced across all members.

By reducing the deficit, this helps to keep the company afloat and members end up getting higher benefits than they would receive if the company became insolvent and the scheme went into the PPF.

Additionally, members could transfer their benefits out of the scheme into a new, more secure scheme separate from their company – but the benefits would be lower than the full promised pension to reflect the size of the deficit.

Either way, if you are entitled to a defined benefit pension, be sure you find out about the size of the scheme’s deficit and the financial health of the company that stands behind it.

If both look bleak, it may be time to speak to your trustees.

Professor David Blake is director of the Pensions Institute at Cass Business School, and author of "The Greatest Good 2" Report

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