Final Salary funding level

Freecall

I wondered if those knowledgeable about FS pensions would care to comment on the level of funding my provider has.

In March 2010 the assets of the plan funded 70% of the liabilities. In March of this year with the poor investments that we have seen it had fallen to 58%.

A winding up projection shows a 50% funding level.

I guess that this is normal...is it?

hugheskevi

A typical scheme in March 2012 was 60% funded on a full buy out basis. In 2010 the typical scheme was 68% funded. (source: Purple Book 2012)

But as the scheme will be protected by the Pension Protection Fund (PPF), it doesn't matter how underfunded the scheme is after a certain point, as once the scheme cannot secure pensions at above PPF levels (roughly, about 70% of full buy-out levels) no matter how underfunded the scheme gets, what the member receives in the event of sponsor default is the same.

Shimrod

I would worry less about the funding level of the pension and more about the financial stability of the sponsoring company. If the sponsoring company is financially sound, then they should be able to fund the shortfall through additional contributions. This will be agreed between the trustees and the company - depending on the nature of the trust deed. It is referred to as the recovery plan. In extreme cases, the pensions regulator can step in and force a recovery plan on the company.

If the company itself is on shaky ground, then it becomes more of an issue (although from March, I would expect the funding levels to be up from 58%). As hugheskevi says, the PPF is there as a backup, although if your expectation is of a pension over circa £31K pa then you will be heavily penalised, as there is a cap of pension benefits payable. You may also find that some other benefits are less generous should you end up in the PPF, although it is generally better than the alternative.

Daniel_Elkington

That isn't particularly normal, in fact quite worrying, however if the sponsoring employer is doing OK then they will be forced to continue to pay the bill.

If they can no longer afford it then they can wind up the scheme, but the sponsoring employer will be subject to fairly large levies to pay for the PPF compensation will inevitably have to pay out.

Suffice it to say, there is very little that you can do at this juncture except maybe get a CETV (cash equivalent transfer value) of your own benefits and see whether it is worthwhile moving elsewhere. You need a pension transfer specialist to do this realistically, these possess either the old G60 qualification or the newer AF3 qualification. If you have a CETV then the adviser should be able to give you an idea of whether it might be worthwhile looking at.

Although with this level of funding I wouldn't anticipate the CETV would be favourable.

Again, check the financials of the sponsoring company, they may be in a position to turn it around.

Freecall

Thanks to all of you. The sponsoring company is pretty strong and it is making additional contributions to help put things back on an even keel.

Having said that, it is a fairly sad situation that has been allowed to develop and should really have been addressed much earlier.

Let's see what the situation is next year.

mania112

Sometimes having an under-funded pension means that they'll offer you an exaggerated transfer value, to unload their liabilities to pensioners - might be worth checking out

Shimrod

mania112 wrote: »

Sometimes having an under-funded pension means that they'll offer you an exaggerated transfer value, to unload their liabilities to pensioners - might be worth checking out

The pensions regulator has given warnings on this, and it still is generally not considered beneficial to the deferred pensioner.