It’s hard to miss the headlines that Theresa May is ready to tackle so-called pension abuse. What does it mean for you and your pension?
Pension abuse refers to companies underfunding their pension schemes; Chief Secretary to the Treasury Liz Truss has also referred to the issue of unscrupulous directors ‘raiding’ pension pots.
The prime minister has promised to tackle these issues, following the recent high profile collapse of Carillion.
Despite the concerns, your workplace pension is probably safer than you think. Both defined benefit schemes and defined contribution schemes are protected by either the Pension Protection Fund or the Financial Services Compensation Scheme, up to a certain value.
The news that Theresa May plans to focus on private sector pension abuse doesn’t come as much of a surprise. Carillion’s collapse has left a pension deficit of £900 million, and this isn't the first time we’ve seen issues with a big pension scheme in recent months. Both BHS and the University sector have faced issues recently, so it can feel like the tip of the iceberg.
An underfunded pension scheme may mean less money than anticipated
The main concern with a collapsed pension fund is not that people won’t be paid at all – there are measures in place to prevent this – but that payments may be less than expected.
In the case of defined benefit pensions, where employees would have been expecting to receive a set sum after retirement, the Pension Protection Fund will step up to make payments. Anyone over pension age still receives their pension in full, while people under pension age will be paid 90% of their pension up to a max of £34,655. Future pension increases may be less than anticipated.
Recently, these pensions have fallen out of favour, and most new workers will instead be on defined contribution pensions. In these cases, the existing pension remains intact and the failed company simply stops making contributions. These are more common, although plenty of people are still in defined benefit schemes – in Carillion’s case, 27,500 people.
What can the government do next?
The government will need to review the different options available, so don’t be surprised if plans seem a little woolly at the moment. Here’s what we do know is that the government intend to release a White Paper in March, which will outline new legislation.
If you are approaching pension age, you’ll find answers to some of the most common questions here.
Source: ‘Theresa May vows to stop private sector “pension abuse”’ – BBC News
‘Carillion: Are pensions on the brink?’ – BBC News