Savers with defined benefit pensions are covered by a Government-backed fund if their employer collapses – but a plan for this to cover 100% of retirement income has been rejected
The Government has rejected proposals to cover 100 per cent of millions of savers’ pensions if their employer goes bust.
Savers with a certain type of pension, known as a defined benefit (DB) plan, are covered by the Government-backed Pension Protection Fund (PPF) if their employer goes bankrupt and cannot afford to pay out its members’ pensions.
The PPF pays out compensation in place of pension payments – typically around 90 per cent of the expected pension for savers who have not retired yet, based on how much they had built up when the employer went bust.
The scheme is funded by a levy paid by eligible pension schemes.
Last year, consultancy Lane Clark and Peacock (LCP) proposed to the government that DB schemes – where savers receive a guaranteed income for life – could opt into an arrangement where the PPF would cover its members’ pensions in full, in exchange for pension schemes paying a higher levy.
But in a blow for savers, the Department for Work and Pensions (DWP) said it had decided not to go ahead with the proposed changes.
Although most savers now save into defined contribution (DC) pension schemes – where an employee pays into their own individual savings pot – there are still around 9.6 million people who are in DB schemes, according to the latest Government figures.
The idea behind LCP’s proposal was that it would benefit members through better guaranteed protection, but it could also empower pension schemes to take more risk with members’ investments, which could benefit the economy, as opposed to them deliberately taking less risk.
LCP said it could also encourage employers to use their “surplus” money to benefit savers and their business.
New Government rules, also confirmed yesterday, will allow DB pension schemes to access extra money they have – known as their “surplus”. Over the past few years, schemes have built up considerable surplus, leading to calls that employers should be allowed to access this money to spend elsewhere.
In a consultation response, the Government said: “We do not consider that an opt-in 100 per cent PPF underpin is appropriate due to the high cost and moral hazard concerns.
“Additionally, we do not believe the underpin is necessary to encourage schemes to extract surplus. We therefore do not propose introducing this underpin.”
Steve Webb, former pensions minister and now partner at LCP, explained that the Government’s main concern is that pension schemes could end up taking too much risk with savers’ money.
“The idea of increasing the cover provided by the PPF was to give pension scheme trustees confidence that if things didn’t turn out, member pensions would be fully protected,” he said.
“But the Government decided this was a step too far and might encourage reckless behaviour by schemes, and it also faced criticism from employers who did not want to pay a higher levy to the PPF.
“But without this extra protection, some pension scheme trustees may still be unwilling to allow surplus funds to be released, despite the new freedoms”.
A spokesperson for the DWP said: “Responses to the consultation have shown that an opt-in levy would not be affordable and could result in schemes taking additional risks. We will therefore not be introducing a 100 per cent guarantee.”
How can I protect my pension?
If you are in a DB pension scheme, you will receive a guaranteed income for the rest of your life when you retire. However, there is the very low risk that your scheme could go bust.
It is always a good idea to have some of your own savings to ensure you are covered if you face a short-term gap in your pension payments.
You can open a Self-Invested Personal Pension (Sipp) and put money into it every month to build up your own retirement pot. Savings in a Sipp are backed by the Financial Services Compensation Scheme up to £85,000.
You can also keep your own savings account. It’s worth considering using an ISA, as any interest you earn on your savings is tax-free. You can pay £20,000 into an ISA each tax year.
