The BHS pensions are about to collapse under the weight of its long-term employees. Due to its promised adjustment to inflation, the Pension Protection Fund can choose to offer limited help or be dragged down with the company.
The PPF is also paid for by taxpayers. Analysts see it as a “dumping ground” for business tycoons who failed to address their pensions liabilities.
With the addition of BHS’ trouble, it now provides about 11 million workers with a final salary pension schemes. It had redressed about 800 schemes and helped 220,000 members over the last 10 years.
Should the PPF fail, taxpayer money would be used to address the pension troubles of tycoons.
However, analysts are positive that the BHS pension deficits aren’t enough to bankrupt the PPF.
They said it is because the fund has built up a large surplus. About £4.8 billion in surplus was recorded the previous year, which makes the BHS trouble easily resolvable.
However, BHS employees, both current and retired, will see their pension entitlements cut. The PPF also offers limited protection against inflation.
BHS workers will receive “compensation” based on 90% of what their pension was worth at the time it became insolvent – ie they will lose 10%. The maximum they can receive is also capped. These caps vary depending on the recipient’s age and are recalculated every year. For example, as of 1 April 2016, the most someone aged 65 can get is £33,678 per year. Entitlements rise in line with inflation each year – again subject to a cap.
According to Kerrin Rosenberg, CEO of Cardano, a pensions consultancy, Tata Steel’s pension scheme is possibly the cause of its downfall. Rosenberg added that it would tip the company into administration and put off buyers.
The pensions scheme, if not resolved probably, would leave 85,000 retired steelworkers and 45,000 current steelworkers an average 20 per cent cut in benefits.
About 15,000 Tata Steel employees contribute to their pensions and 30,000 are deferred members until retirement.
“The pensions system puts British companies at a competitive disadvantage. There is a noose round the neck of corporates. If we follow the rules the only route is to put Tata Steel into insolvency and the fund into the Pension Protection Fund.”
Tata Steel, struggling to liquidate its assets, had found no companies that would handle its pension liabilities.
The company has a £15 billion commitment to its 135,000 current and former steelworkers.
The UK government had looked into answering the pension scheme by nationalisation. However, many fear it could cost the taxpayer billions and it may also breach state aid rules.
Independent Pensions Consultant John Ralfe also said:
“No buyer of the individual Tata Steel plants will take on any pension liabilities, which will remain with Tata Steel UK. Once all the plants are sold or mothballed, there will be no underlying business to support the £15bn British Steel pension scheme and it looks certain to end up in the Pension Protection Fund.”
For millenials, the concept of pension savings is not farfetched. But it can be a bit difficult.
Having a job and earning way less than generations before them, millenials struggle to balance work, life and retirement. Especially in the United Kingdom.
Maybe the lifetime ISA (LISA) can give them the edge they need.
Anybody employed between 18 and 40 years old could save up to £4,000 a year.
Their savings is also free from tax. If they follow the government’s advice, the accounts they hold could earn a 25pc bonus by the time they reach the age of 50.
The bonus amount will help bolster their retirement income as they reach 60 years old.
Many believe LISA could contend against the employer-mandatory auto-enrolment for pensions.
LISA’s one disadvantage when compared with auto enrolment would be the inability to use the money unless it is for retirement or for buying new property.
The government auto-enrolment option allows spending for more than just house savings.
If an employee requires more money, he or she can access their money. However, they forfeit several perks of the government’s auto-enrolment pensions scheme.
Many UK MPs believe LISA could replace auto-enrolment over time to provide a usable pension ISA for everyone in the United Kingdom.
Some believe the scenario may become an alternative to auto-enrolment to give flexible and attractive solutions for low-wage earners.