Security In Retirement - A Thing Of The Past?

Why the ‘defined benefits’ gold standard is a luxury of the past

The provision of defined benefit pension schemes has been dwindling almost to extinction in Britain over the past 20 years. It used to be the norm that you’d qualify for a pension that was determined by your final salary on retirement and the number of years of service at the company. But these gold standard schemes are rarely offered to new employees anymore and those with existing ones increasingly find theirs at risk of change.

Let’s be clear: there has not just been one pension “thief”. There has been a coalition of culprits who through their own greed, selfishness and regulatory incompetence have systematically raided workers’ employer’s defined benefit pension funds. Listed on the charge sheet are a muddled assortment of inept and grasping politicians, some misguided accountants and ultra-cautious actuaries, a complacent Bank of England, a docile pension regulator and, finally, increasingly indifferent and uncaring employers.

Worse, the abolition of these defined benefit schemes is not even being restricted to new employees. Companies are now coming after existing employees too. Less than 50% of these FTSE 100 companies now provide “any form of ongoing defined benefit accrual to any of their [existing] UK employees”.

Smash and grab...

Politicians from across the political spectrum have played their part in this. In 1988, Margaret Thatcher’s chancellor of the exchequer, Nigel Lawson, imposed a tax on pension fund surpluses in a bid to stop pension schemes taking advantage of tax relief to build up their reserves. This policy change led to many companies taking a “holiday” from contributing to their reserves, in order to avoid this tax.

Initially, this wasn’t a problem. Booming stock markets in the 1990s led to even fatter pension fund surpluses and this proved an irresistible target for the Blairite government that came to power in 1997. The chancellor, Gordon Brown, abolished substantial tax relief on dividends that pension funds received on their investments.

The financial effect of this tax snatch was colossal. It was estimated that the loss of this tax relief had extracted, in total, over £118 billion of income by 2014. If this lost income had been even conservatively invested, pension funds may have benefited by an additional £230 billion.

In the late 1990s, there was a major change in both national and international financial reporting standards for company pension schemes – with little thought given to the consequences. For the first time, new accounting rules required companies to recognise pension fund deficits in their own balance sheets soon resulting in multi-billion-pound financial black holes appearing in many company balance sheets.

Some believed that this was unnecessary. But, unlike other liabilities, these pension scheme deficits can significantly shrink and even disappear by themselves through investment growth over the decades. Nevertheless, employees received little sympathy from accounting regulators – even though accountants should have been fully aware the reporting changes would likely finally sign the death warrant for defined benefit schemes.

Some actuaries and accountants have also often been excessively conservative and highly risk adverse in valuing pension fund liabilities. These liabilities are largely pensions that are, or will be, paid to employees – often 30-40 years in the future. It is often assumed that pension fund investments will consist only of low risk and low interest rate bonds, rather than other assets such as equities and property with greater growth potential. Indeed, the Bank of England has also helped to keep these bond yields low by its prolonged imposition of a low interest rate.

The pensions regulator, meanwhile, has often been reticent about protecting the interests of employees and pensioners. It could, and should, have intervened much earlier to insist companies do more to financially assist struggling pension funds. For example, after retailer BHS’s collapse, MPs suggested that the regulator was asleep on the job in protecting pension fund members.

Finally, many company directors have frequently prioritised the interests of shareholders above members of pension schemes. LCP’s recent figures show that in 2017 FTSE 100 companies paid out £80 billion in dividends to shareholders which “is six times higher than the £13 billion” that they injected into their UK pension schemes.

So now what? - Protect your entitlements! Complimentary Pension Review for all East-Asia based ex-pats now available

With the perpetually worsening state of the UK pension system, our UK team are encouraging us to all look into how to best secure against more losses via our complimentary review service for any UK-based funds (see below). To those who are currently in the process of having these reviewed by our team, we'll be in touch once we know more & the reports are received so we can explore your options in securing these. For those who aren't yet, happy to be extending this complimentary service out to you.

To clarify, this complimentary service is for review purposes only and in no way allows for funds to be touched or moved. This non-obligatory and non-contractual service is something my team and I are able to utilise through our UK office to help British expats (or those who have spent more than 2 years working in the United Kingdom) now based in East-Asia.

✓ Full valuation✓ Legal entitlements✓ Debt level/solvency of scheme✓ Current/past fund performance✓ Current death benefits (how much is passed to whom upon death)✓ Guaranteed minimum pension (GMP)

Exploring your options in securing these is advised since there are significantly more flexibilites as you are an expat and no longer a UK tax-resident. My team and I also encourage & are happy to help with checking your National Insurance contributions to ensure you receive your 8,091 GBP per year in retirement (regardless of where you are residing at the time!).