The BHS and Tata steel pensions crises should be “a wake-up call” for the 50 per cent of people with final salary pensions who are “complacent to the alarming risks that burgeoning deficits pose to their retirement funds”, warns the boss of one of the world’s largest independent financial advisory organisations.
The comments from Nigel Green, founder and CEO of deVere Group, come as BHS becomes the latest major British firm to collapse with huge pension burdens. Sir Philip Green, who owned the retailer for 15 years, is due to be grilled by MPs next week over the situation.
They also come on the back of a possible legal challenge to the proposed unprecedented move to switching from the RPI inflation index to the lower CPI measure for Tata Steel members’ future pension increases.
Mr Green observes: “The highly publicised problems surrounding BHS and Tata Steel pensions should serve as a timely wake up call to those with UK defined benefit pension schemes.
“The Tata Steel case, for example, underscores what we have been saying for far too long: that many of the laws surrounding DB pension provision are outdated and no longer of an acceptable standard. In short, they are not fit for purpose in today’s world.
“However, unfortunately, the myth that final salary schemes are guaranteed is alive and well.
“More than 50 per cent of new or potential clients fail to fully appreciate how the pension deficit crisis could have devastating financial consequences for their retirement.”
He continues: “But the harsh reality is that many final salary schemes are on the edge of an abyss.
“Many firms can no longer afford these expensive schemes with defined-benefits retirement packages that have pensions linked to their earnings and employment. There’s simply not enough cash in their pots to meet future obligations. Too many schemes have become simply unsustainable.”
Mr Green goes on to say: “Sadly, it is unlikely that there will be a monumental step away from the abyss for many of these schemes.
“There is, of course, the Pension Protection Fund, the State-backed rescue fund – but this is not guaranteed by the government and the level of benefits payable by the PPF are typically far lower than what savers would expect to get from their firm’s scheme. Also, it is the responsibility of firms to fund the PPF, which puts more pressure on their own scheme.”
The deVere CEO concludes: “With the pensions black hole becoming ever bigger, as depressingly highlighted by these recent high profile cases, those with final salary schemes should seek independent financial advice on how they might be able to mitigate the risks that their scheme could face.
“There are usually steps that can be taken, but I would suggest that this retirement planning revision needs to be done sooner rather than later.
“It is better to ask the tough questions now rather than having to ‘downsize’ your retirement ambitions later.”