The need for workers to look after their own pensions provision has been underlined again, as figures reveal that 75% of UK final salary company pension schemes are now officially in deficit.
Total deficits in final salary company pension schemes reached £52bn in January 2010, having stood at £33bn just a month earlier, according to the Pension Protection Fund (PPF).
Final salary company pension schemes pay retired workers a retirement income related to their salary when they leave the company, and their total years in service.
However, the investment risk for this type of company pension lies with the company, if the investments in the scheme fail to provide sufficient revenues to meet its commitments to past employees. This is because, in this situation, the company must ‘stump up’ from its own funds to make up the difference and ensure that payment obligations are met.
For this reason, many companies have been financially drained by their pension schemes in recent years, and have initiated a strategy of systematically dismantling their final salary scheme by closing it to new members.
The alternative for many workers will be a defined contribution pension scheme, where retirement income is still dependent on the investments in the scheme, but there is no guaranteed level of income. In other words it is the worker, and not the employer, who bears the risk if a pension fund underperforms.
Workers are free to look beyond company pension schemes by setting up their own pension with the pension advice of a qualifed independent financial adviser.
