Company pension contributions

Legacy_user

Can some one expert explain what happens when we read that a company pension fund has a "black hole" or a deficit, and is forced into making substantial contributions from ordinary company funds into the pension fund?


Southern Water's pension scheme is I presume a defined benefit one?
We are often told that DB schemes don't have a fund, so where do these extra contributions go?

Are defined benefit contributions, employee and employer, subject to the same annual limit of £40,000 as defined contribution schemes?
How will the company increase contributions to the pensions of those already receiving pensions - I thought this was not allowed or subject to a very small limit?
Will the company receive tax relief, through corporation tax offset?
How will it satisfy the usual requirement that contributions have to be commensurate with the benefit to the company?


If I discovered that my pension pot had performed badly, would I be allowed to top it up with the odd million from my company?

AlanP_2

Clifford_Pope wrote: »

Can some one expert explain what happens when we read that a company pension fund has a "black hole" or a deficit, and is forced into making substantial contributions from ordinary company funds into the pension fund?

The employing company agrees a plan with the Actuaries / Trustees to top the pot up so that current and projected future benefits can be paid when they fall due.

Southern Water's pension scheme is I presume a defined benefit one?
We are often told that DB schemes don't have a fund, so where do these extra contributions go?

Most Public Sector DB schemes do not have a pot (the LGPS does) and future payments are essentially paid from tax revenues. Private Sector schemes have a pot that is invested in equities / bonds / property etc. etc. and those investments go up and down the same as your personal investments.

Are defined benefit contributions, employee and employer, subject to the same annual limit of £40,000 as defined contribution schemes?
How will the company increase contributions to the pensions of those already receiving pensions - I thought this was not allowed or subject to a very small limit?

Yes and No - There is the same £40k limit but it isn't calculated based on contributions. Instead it is based on 16x the increase in annual pension accrued by the employee. So for example, if somebody had a promotion or significant payrise then they can quite quickly exceed the £40k (particularly if they have long service).

Will the company receive tax relief, through corporation tax offset?

Would be treated the same as any company contribution so yes.

How will it satisfy the usual requirement that contributions have to be commensurate with the benefit to the company?


If I discovered that my pension pot had performed badly, would I be allowed to top it up with the odd million from my company?

Does the Ltd company you own run a DB scheme?

As per inline answers

System

There is the same £40k limit but it isn't calculated based on contributions. Instead it is based on 16x the increase in annual pension accrued by the employee. So for example, if somebody had a promotion or significant payrise then they can quite quickly exceed the £40k (particularly if they have long service).




Are you saying the additional contributions Southern Water, for example, are making are limited on the same basis? The £50m is divided between the number of contributing members?
How do they contribute to the pensions of retired members?

sandsy

Clifford_Pope wrote: »

Can some one expert explain what happens when we read that a company pension fund has a "black hole" or a deficit, and is forced into making substantial contributions from ordinary company funds into the pension fund?


Southern Water's pension scheme is I presume a defined benefit one?
We are often told that DB schemes don't have a fund, so where do these extra contributions go?

DB schemes don't have a fund for each individual member. Private schemes have a pooled pot of money, invested in assets, which has to pay out benefits for all members.

As you can imagine, that needs careful managing to ensure that there are sufficient funds in the pot to not only pay current pensioners but future pensioners too, especially given the wide range of unknowns - future investment returns, future pension increases, future increases up to retirement for those still to reach retirement, unknown but improving longevity. The mix of members of different ages and with different ranges of unknowns will define the investment strategy to a large extent.

When the pot falls short of what it might be expected to need to pay out the various benefits (and many are in this situation at the moment due to various economic and demographic factors), the employer might be asked to pay in more contributions. These just go into the general pot to be invested for the benefit of all members. There is no individual allocation.

Marcon

Clifford_Pope wrote: »

How will it satisfy the usual requirement that contributions have to be commensurate with the benefit to the company?

Overriding legislation, which takes precedence over the 'benefit to the company' argument.

hyubh

Clifford_Pope wrote: »

Are you saying the additional contributions Southern Water, for example, are making are limited on the same basis? The £50m is divided between the number of contributing members?

One way to look at it - the Annual Allowance concerns *new* 'pension savings', whether that's pension contributions for the current tax year into a DC scheme, or new accrual under a DB one. A deficit payment into a DB scheme, in contrast, concerns giving additional backing to pension promises already made by the sponsoring employer, assuming the latter is a going concern.

The difference is possibly clearest in the case of employer with a DB scheme that is going bust, with the scheme therefore heading into the PPF - any demands for additional payments into the scheme by the Pensions Regulator isn't to bolster member benefits (they will get standard PPF 'compensation' levels regardless), it's to limit the impact on the PPF itself, and by extension, all remaining private sector DB schemes, given the way the PPF is funded (i.e. the assets of schemes that fall into it + an industry 'levy').

System

Thanks all. I understand that these are rather special and hopefully unusual circumstances. It just struck me as interesting that it was possible to pay in millions of pounds to bolster some schemes whereas with others there were annual and lifetime limits.
I presume if a private pension's investments were ailing there is no corresponding ability to inject additional funds - the administrators or advisers and pensioners are expected to live with the consequences?


I'm not in this position - I'm just curious.

hyubh

Clifford_Pope wrote: »

I presume if a private pension's investments were ailing there is no corresponding ability to inject additional funds - the administrators or advisers and pensioners are expected to live with the consequences?

But in a DC scheme (if that's what you mean by 'private pension'?), no pension promises have been made that need supporting. If (hypothetically speaking) a DB pension fund overshoots what is needed to actually pay the pensions promised, scheme members will have no particular right to the proceeds - they go back to the sponsoring employer. In contrast, with DC, once the employer has paid their initial contributions, that's it - if investments perform better than originally envisaged (insofar as there is any envisaged outcome), then the individual member benefits, and if they perform worse, than the individual member loses out.

sandsy

Clifford_Pope wrote: »

Thanks all. I understand that these are rather special and hopefully unusual circumstances. It just struck me as interesting that it was possible to pay in millions of pounds to bolster some schemes whereas with others there were annual and lifetime limits.
I presume if a private pension's investments were ailing there is no corresponding ability to inject additional funds - the administrators or advisers and pensioners are expected to live with the consequences?


I'm not in this position - I'm just curious.

The difference is in who carries the risk. In a DB scheme, the employer takes on the risk and is obligated to make good in a downturn. In a DC scheme, each member carries the risk of their own fund being insufficient. And yes, their ability to do so is restricted by various tax limits although these don't entirely prevent additional contributions being made, only the extent to which tax benefits can be claimed in respect of those contributions.