Pension News from Around the Web

PPF 7800 deficit almost doubles in a year

The total funding level of the Pension Protection Fund (PPF) 7800 index has worsened for the fourth month in a row, after further gilt yield falls.
The lifeboat fund’s analysis showed how the funding ratio for the 5,945 schemes dropped to 76.1% by the end of August from 79.2% in July and from 84.3% in August 2015. The total deficit rose from £376.8bn…

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FTSE-100-firms-spent-five-times-dividends-pension-payments

Britain’s biggest companies paid out five times more to their shareholders than they spent plugging the gaps in their pension funds, according to a report.

In what is set to fuel anger over pension scheme funding following the BHS collapse, research revealed FTSE 100 firms with defined benefit schemes – offering a guaranteed income in retirement – paid out £71.8 billion in dividends last year compared with £13.3 billion in pension contributions.

The report, by pensions experts Lane Clark & Peacock (LCP), found that of the 56 blue chip firms which disclosed a shortfall in their pension funds last year, they paid out £53 billion in divis to investors against £9.5 billion in pension contributions.

hose firms could have more than wiped out a combined deficit of £42.3 billion with the cash handed out in divis.

The findings come amid mounting fury over firms putting investors over pension fund members.

Retail tycoon Sir Philip Green recently came under heavy fire in an MPs’ report after the collapse of BHS left the chain with a £571 million pension deficit, while his family and other investors were paid more than £400 million in dividends.

He is in talks with the Pensions Regulator over a rescue deal for the BHS scheme and has pledged to address the funding woes.

Tata Steel, which owns Britain’s largest steel works in Port Talbot, is likewise in discussions with the Government over a restructuring for the British Steel pension scheme, which has liabilities of more than £14 billion.

LCP cautioned that other firms with pension funding gaps could face action from the regulator on their dividend policy.

Bob Scott, a senior partner at LCP, said: “The collapse of BHS and the potential sale of Tata Steel UK, both with underfunded pension schemes, have highlighted the significance of pension liabilities and the impact that a large defined benefit scheme can have on a UK company.

“Companies with large deficits may see pressure from the Pensions Regulator on their dividend policy in light of the Select Committee’s report into BHS.”

The report also highlights the funding crisis faced by pension schemes following the Brexit vote, with the shortfall in FTSE 100 firms hitting a mammoth £63 billion last week

This is up by £42 billion since just before the referendum and £17 billion since the end of July alone as the interest rate cut and Bank of England’s quantitative easing programme to ward off recession hits the value of pension fund assets.

Nigel Green, founder and chief executive of financial advice firm deVere Group, said the Brexit vote had created “the mother of all storms for pensions” and warned it could “topple” some firms and their pension schemes.

He said: “All in all, Brexit has been disastrous for UK pensions.”

“The scale of these enormous deficits casts doubt on the very survival of many company pension schemes and in order to survive they will need to make drastic changes to the terms of employees’ pension schemes,” he added.

But the Pensions Regulator said its calculations from earlier this year suggest that despite soaring deficits, most schemes should be able to at least maintain existing funding plans, even if some firms cannot increase contributions if they need to invest for growth.

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Short-term pension boost to follow reforms

The majority of new pensioners will gain from the “flat-rate” state pension in the early years after it is launched in April, government figures suggest.

However, people retiring in decades to come are more likely to lose out financially from the reformed system.

The new UK state pension, aimed at simplifying the system, will see a bigger payment of £155 a week made to many new pensioners from April 2016.

Not all new retirees will receive the full amount.

Winners and losers

Chancellor George Osborne has set the new pension at £155.65 a week, compared with the current £119.30.

It includes all the extra payments available at the moment, such as means-tested Pension Credit and the earnings-related State Second Pension.

Under transitional arrangements, most people retiring will not receive the headline figure. They will get more or less, depending on their National Insurance contributions.

Now the Department for Work and Pensions (DWP) has calculated that in the first 15 years, some 73% of people who reach pension age will find they are getting more than if the old system had carried on. The typical gain for them is £10 a week.

In the early years, the typical loss for those getting less will average £7.

By the time people just starting out in the world of work, aged in their 20s, come to retire, virtually all will qualify for the full flat-rate payment.

However, this younger group will do much worse than if the current rules were left alone. Some 69% of those retiring in 2050, now in their 30s, will lose out compared with staying in the current system, typically by £14 a week.

Some 76% of those aged in their 20s will typically get £15 a week less.

One reason is that they will no longer be able to contribute to the earnings-related State Second Pension, one of the payments which is being rolled into the new flat rate pension to make it affordable for the Treasury.

Existing pensioners are not affected by the change. They will continue to receive their current basic state pension with annual upratings.

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Pension information given to millions ‘is wrong’

Millions of people may be planning their retirement based on wrong information thanks to government “bungling” MPs have warned.

The Commons Work and Pensions Committee said details sent out about when people will get state pensions and how much they are worth were “inadequate” and “confusing”.

It warns this particularly applies to women, whose pension age is changing.

The DWP said it was working hard to help people understand the issues.

The state pension age will reach 66 by October 2020, with women’s pension age being raised to match that of men’s.

Previously, women’s state pension age was 60, with men’s set later at 65.

The Work and Pensions Select Committee has prepared an interim report on the New State Pension (NSP), which replaces the basic and additional state pensions from April.

MPs said they had done this because the situation was too urgent to wait for the full inquiry to be completed.

Misunderstanding

The report said there were “widespread concerns” that women had been unaware of increases in their state pension age dating back to 1995.

One woman told the MPs she had been sent a letter by the Pension Service in 2005 that did not mention her retirement age.

In 2012, two years before her 60th birthday, which she thought was her pension age, she received another letter saying she was not entitled to draw that until she turned 66.

The report said: “At a crucial time of reform to the state pension and the state pension age, Department for Work and Pensions (DWP) statements are insufficiently clear.

“This lack of clarity increases the chances that people misunderstand the value of their state pension or the age from which they will receive it. In turn, this increases the chances that they will not best plan for retirement.”

‘Bungled’

The committee said statements should be fitted on to a single page, with key messages highlighted in boxes for greater ease of understanding.

They should list the current value of the state pension built up alongside the age at which people will be eligible to receive the income, and how they can build up retirement funds.

The committee’s chairman, Frank Field, said: “Successive governments have bungled the fundamental duty to tell women of these major changes to when they can expect their state pension.

“Retirement expectations have been smashed as some women have only been told a couple of years before the date they expected to retire that no such retirement pension is now available.”

A DWP spokesman said: “We are committed to ensuring that the public understands the positive changes being made to the state pension. We’ve already done a huge amount – including TV, radio and print advertising – and this activity will continue over the coming months and years.”

They added that the DWP was working closely with the select committee on its current inquiry.

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UK pensions two decades behind on liabilities

UK pension funds face a two-decade wait before they have enough cash to meet their liabilities and the assets needed to pay the pension requirements of their members.

The funding level of so-called defined benefit pension schemes, where the employer promises to pay a pension typically based on a proportion of final salary, is worse now than in 2006, according to Redington, the pension consultant.

Dan Mikulskis, co-head of investment strategy at Redington, said the growth of liabilities at UK pension funds continues to outstrip the growth in assets, despite substantial contributions from the companies that back the schemes.

Many well-known companies, including BT Group, the telecoms company, and energy businesses Royal Dutch Shell and BP, have pension deficits that run into the billions, according to LCP, the pensions consultancy.

Redington estimates it will take until 2036 for the UK pension industry to collectively be fully funded. This figure is based on employers continuing to contribute £20bn per year and expected returns of 1.7 per cent.

Mr Mikulskis said pension funds are paying the price for cutting their equity holdings in the wake of the financial crisis, from 61 per cent to 33 per cent over the decade.

William Bourne, director at City Noble, an adviser to pension funds, said: “[The] research points to a longstanding truth that has been partly forgotten in the private sector over the past decade, that equities are the natural asset class for any open [defined benefit] scheme, because they provide a growing cash flow and some protection against inflation.”

Amin Rajan, chief executive of Create Research, a consultancy, said the switch from equities to bonds worked well for plans with healthy surpluses. However, he added: “It has proved lethal for those with large deficits and negative cash flows caused by ageing membership.”

These pension funds have missed two strong equity rallies over the past decade, Mr Rajan said. Many also piled into fixed income when prices were at “sky-high levels”, meaning they “paradoxically ended up using risky assets to de-risk their portfolios”.

He said: “The switch from equities to bonds [by pension funds] was done with the best of intentions but it has ended up delivering the worst of outcomes.”

According to the Pensions Institute, a research body, about 1,000 private-sector pension schemes are “highly unlikely” to pay their members’ pensions in full because of huge levels of underfunding and financial stress.

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Firefighters to receive pension payouts after government concedes case

Some firefighters are in line for payouts running into thousands of pounds after the government effectively conceded they had been short-changed on their pensions.

The “significant legal victory” announced by the Fire Brigades Union (FBU) relates to a controversial policy that meant many of its members had to pay in for up to 32 years in order to receive a 30-year pension.

This has long been regarded by many firefighters as an injustice, and the matter was due to be decided in court after the FBU lodged a legal challenge – but at the 11th hour the government has conceded the case.

The way the firefighters’ pension scheme worked was that it had an “accrual cap” of 30 years service, which meant no more pension could be built up after a member had reached that point.

However, the earliest age at which someone could receive a 30-year pension was 50, which meant those who joined the pension scheme at the age of 18 or 19 had to contribute for up to 32 years in order to receive it. This is the age at which many firefighters have been able to retire.

One of those affected by this issue is Gary Mitchell, who lives in Corby, Northamptonshire, and retired from the fire service in September this year after turning 50 that month. He joined the service when he was 18, and said: “When I finished in September, I had paid 31 and a bit years of contributions for a 30-year scheme.” Mitchell added he could never understand why he had to pay pension contributions between the ages of 18 and 20 for no benefit. “We used to call it the 18 to 20 club. There was a group of us, and we could never get an answer. It was: ‘That’s the way it is.’”

The Department for Communities and Local Government has now confirmed it will allow members under the age of 50 who have built up 30 years’ service to take a “contributions holiday” from the time they reach this point until they reach age 50.

The proposal is to be applied retrospectively to 1 December 2006 – the date, according to the FBU, when age discrimination of this type became unlawful.

This means that people such as Mitchell, who paid in for more than 30 years before reaching the age of 50, will now get a refund of their pension contributions for the relevant period, with interest on top.

The FBU has 38,000 members, and it is thought some may be in line for payouts of up to £7,000 apiece. “This issue has been of concern for many years, particularly among those members affected – that is, those who joined the service and pension scheme before the age of 20,” said a union spokesman.

A spokesman for the DCLG said: “This relates to a historic technical issue in the 1992 Firefighters’ Pension Scheme. The government will be working with fire service unions and employers to finalise the pension arrangements for the relatively small number of firefighters who joined the service before the age of 20 and served for over 30 years.”

During the past two years or so, firefighters have staged a number of walkouts connected to planned wider pensions changes and an increase to the retirement age.

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UK state pension ‘one of the world’s lowest’, says OECD

Pensioners in the UK receive much less state pension than they would in many other countries around the world, according to the latest figures from the Organisation for Economic Cooperation and Development (OECD).

At present the full basic state pension equates to just 16% of the nation’s average earnings. That is really low when compared to other countries – the OECD believes the average is 20.5%.

However, pension credits brings the total value of the UK pension up to 21.6% of average earnings. While that is in line with the average, it is well below that of many other developed countries.

For example, in Ireland pensioners receive 33% of the average wage.

How our pension compares

British pensioners receive a state pension in line with what Swiss and Japanese retirees receive, but well below the pensions in New Zealand, Denmark and Ireland.

At the other end of the spectrum Chinese pensioners receive state handouts that equate to just 2% of the average wage.

The UK also has one of the lowest average ‘replacement rate’ retirement incomes in the developed world.

This takes your net pension entitlement and divides it by your net pre-retirement earnings to show how effectively the pension system provides a retirement income to replace your earnings. The lower the figure is the greater the income drop pensioners face when they retire.

The only countries who are worse than us on this measure are Mexico and Chile.

British pensioners have an average replacement rate of 40% compared to an OECD average of over 60%.

“The analysis makes embarrassing reading for the politicians who have been responsible for the UK’s pensions over the past 25 years,” says Tom McPhail, head of retirement policy at investment and pensions company Hargreaves Lansdown. “The challenge now is to make sure the amount being invested into pensions is increased as quickly as possible.”

Gender inequality

The UK is also one of the few countries to still have different state pension ages for men and women.

In 2014 British women could receive the state pension at the age of 62.5 compared to 65 for men. The age is going to converge at 65 in 2018.

The fact that our retirement age is gradually being increased to 67 by 2028 means Brits will be among the oldest to retire in the world. Only Ireland and the Czech Republic intend to make their citizens work until they are 67, with 65 remaining the average state retirement age around the developed world.

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State pension: public sector workers may get inflation-linked benefits after all

The Government could ride to the rescue of millions of civil servants who stand to lose inflation-linked pension increases under the new state pension rules applying from April. Private sector pensioners in the same quandary are unlikely to be helped.

Under the new pension regime, around seven million people employed across both the public and private sector will see some reduction in retirement income due to the loss of valuable index-linking on final salary benefits built up in the eighties and nineties.

Since 2012, when the new pension was still in planning stage, Government officials have known that around three quarters of those workers who chose to “contract out” of their pension schemes in the eighties and nineties would lose some element of index-linking. Apart from in these pages, little has been done to warn those affected.

But with less than five months to go until the new scheme is in place Telegraph Money has discovered the Treasury may reinstate this so-called “future proofing” for public sector workers.

According to rules dating back to the Seventies, the Government still has an obligation to index-link the pensions of public sector workers and people who work for private firms where these are contracted to work for the Government.

A bailout would not need to be extended to wider private sector workers because their pensions are managed separately from taxpayer-funded pensions, and are viewed differently in law.

Restoring the index-linking would mean a 64-year-old man working in the public sector with average lifetime earnings of £30,000 will be £17,000 better off than his private sector equivalent, according to calculations by Mercer, a pension firm.

Tom McPhail, head of pensions policy at Hargreaves Lansdown, warned a public sector bailout would cause by worsening the growing gap between generous public and watered-down private sector arrangements.

Affected savers are those who paid into final salary pensions between 1978 and 1997. During those years most savers swapped a chunk of their future state pension for an alternative benefit provided by their employer.

Previously the Government paid for the benefit to rise in line with inflation but for those retiring after April 2016 it will not.

A Treasury spokesman said: “The Government is committed to ensuring older people can live with dignity and security in retirement, which is why we have committed to increasing the basic state pension by the triple lock which means that it increases each year by the highest of the growth in average earnings, inflation, or 2.5pc.

“Next year, this will mean a full basic state pension will rise to £119.30 a week, an increase of £174.20 per year – the biggest real terms increase in the basic state pension in 15 years. We’re also simplifying the state pension and providing more support for the poorest pensioners. From April 2016, those reaching retirement will receive a new single-tier pension.”

“As a result of the changes to the state pension system, the Government – as a large employer – is currently considering how best to address changes to public service pension schemes and their members, which includes the treatment of Guaranteed Minimum Pension indexation.”

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UK state pension amongst least generous, says OECD

The UK’s state pension is one of the least generous in the world, according to a report from an international think tank.

The Organisation for Economic Co-operation and Development (OECD) said that only two OECD countries pay poorer pensions.

Those countries are Mexico and Chile.

Meanwhile countries like Turkey, Russia and Greece pay significantly bigger retirement incomes, according to the report, Pensions at a Glance 2015.

The study compared pension income to the salaries that people earned while they were working.

For those earning an average salary in the UK, it found that the so-called replacement rate was 38.3.

In other words, typical pensioners earn just over a third of what they do when working.

‘Embarrassing’

Out of 34 OECD members, 31 countries have more generous public pensions than the UK, the figures suggest.

“This analysis makes embarrassing reading for the politicians who have been responsible for the UK’s pensions over the past 25 years,” said Tom McPhail, the head of retirement policy at Hargreaves Lansdown.

“The state pension was in steady decline for years and even now, is improving for lower earners but average payouts will not be rising.”

The basic state pension is currently worth £115.95, but will rise to £119.30 in April 2016, as a result of the triple-lock.

That means that pensions rise by whatever is highest – earnings, inflation or 2.5%.

From April, those on the new flat-rate pension will be able to get up to £155.65, but they will need to have 35 years of National Insurance Contributions(NICs) to claim the full amount.

Better off

However, when private and workplace pensions are taken into account, the UK scores much better.

Based on average salaries, the UK comes 15th out of 34 OECD countries for generosity.

The UK’s replacement rate for all types of pension is 71.1 – in other words retirees earn 71% of their previous incomes, after tax.

In this respect, pensioners in the UK are better off than their peers in France (67.7) and Germany (64.7).

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