The recent coronavirus epidemic has many people wondering how it will impact their final salary (also known as Defined Benefit) pension. Provided your former/current employer manages to stay in business – your pension should be safe*, which is great news.
Public sector schemes, such as those for teachers, nurses or civil servants are also protected because most are funded by taxation. Because of this, they remain unaffected by movements in the stock market or companies going bust.
On the other hand, if you work in the private sector then your Final Salary pension is backed by a fund purposely allocated to pay your pension, along with your colleagues. That fund is controlled by a group of trustees who make decisions such as how best to invest it, along with how it should be managed.
That scheme then goes through a valuation process every three years, where the group of trustees look at all of the pensions that will be paid over the coming decades. They then compare this with the returns they expect to receive on the money that sits in the fund.
If there is a clear deficit then the Pensions Regulator expects the scheme to propose a ‘recovery plan’, which normally involves the employer agreeing to make additional contributions, across a set number of years to clear the shortfall.
How the coronavirus will impact Final Salary pensions varies from scheme to scheme. Extremely low-interest rates are bad news for company pension schemes because low returns will need to be offset with additional money now to pay any future pension promises. If a scheme had invested in stock market shares, these will have dropped.
With businesses struggling for additional cash because of the crisis, the Pensions Regulated has allowed employers to defer making payments into schemes, for up to three months, if necessary. Provided this doesn’t last too long then employers should be able to make up lost ground and get the pension funding level back up to par.
In the event that the economy suffers in the long term, the increased shortfalls, combined with reduced contributions potentially pose enormous problems for Defined Benefit pension schemes.
Should your employer go out of business (if it is in a sector most hit by COVID-19 for example), at a time when it lacks the capital to pay all of the future pension it’s promised to pay, then it’s highly likely you would see some impact.
If the scheme is registered in the UK and it was significantly short, then it would likely end up in the ‘lifeboat’ Pension Protection Fund.
* Most Defined Benefit Pensions are protected by the Pension Protection Fund up to 100% in value.