Funding gaps

Sterlingtimes

If a final salary pension has a funding gaps, e.g. 70% funded, are the trustees not paying out current pensioners at the potential cost of future pensioners by maintaining full contractual contributions?

Is there a point at which trustees would reduce payments to all beneficiaries to even out the risk?

Zelazny

Not sure if it's still the case, but it used to be that for schemes in wind up with a funding deficit, there were certain sorts of liabilities that took precedence over others.

For example, any pensions in payment were considered more important than pensions not yet in payment. As a result, the pension that are currently in payment would normally not be reduced (although if the increases to such pensions are in excess of the legal minimum, the increases may be curtailed).

As Final Salary schemes are covered by the Pension Protection Fund (PPF) now, any pension in payment where the member is over their Normal Pension Age should not be reduced.

hugheskevi

If a final salary pension has a funding gaps, e.g. 70% funded, are the trustees not paying out current pensioners at the potential cost of future pensioners by maintaining full contractual contributions?

Everyone will be paid out in full if the sponsoring employer remains solvent.

If the sponsoring employer becomes insolvent, the scheme enters the Pension Protection Fund if it is underfunded, and all members receive Pension Protection Fund (PPF) levels of benefit. This is at 90% of the expected level of pension (with a few other losses, particularly around indexation)

You could argue future pensioners suffer by paying out full benefits if by cutting pensioner benefits, scheme funding was pushed up above 90% on a PPF funding basis, and hence in the event of the sponsoring employer becoming insolvent, future pensioner members would receive more than PPF-level benefits.

Is there a point at which trustees would reduce payments to all beneficiaries to even out the risk?

Not unless the sponsoring employer becomes insolvent.

Not sure if it's still the case, but it used to be that for schemes in wind up with a funding deficit, there were certain sorts of liabilities that took precedence over others.

The Priority Order when schemes wind-up changed with the start of the PPF, back in c2005, so that members entitlement was PPF levels of benefit or whatever the scheme could buy-out if it had funding levels above PPF levels.