Golden goodbyes offered by pension trustees to retirees on DB pension schemes

Britons coming up for their final years in employment and planning to retire overseas are concerned over the best way forward for their defined benefit pensions.

A recent report has confirmed the black hole in final salary workplace pension schemes provided by employers. In spite of the 2017 gap between liabilities and assets having closed by some 35 per cent, the shortfall still stands at £460 billion, according to a track of pension values via PwC’s SkyVal Index.

The accountancy firm’s monthly analysis of liabilities, assets and deficits of 5,800 of the UK’s direct benefit pensions schemes shows total assets of £1.52 trillion as against the £1.98 trillion needed to cover calls on assets from pensioners who’ve paid into the schemes. Direct benefit pension schemes pay out to retirement savers on a basis including final salary and length of service with an employer. Benefits include a guaranteed, index-linked income for life, with the schemes a popular and reputedly safe way to provide a decent level of much-needed extra cash in retirement.

However, during September long-term real interest rates relative to inflation have increased, leading to a reduction in liabilities of £50 billion but no effect has been felt on the deficit as asset values were falling at the same time. The monthly swing in the size of the deficit is linked to small market movements, as shown by the monthly volatility. As a result of the deficit, a number of pension trustees are offering ‘golden goodbyes’ to retirement savers, often worth 20 times or more the annual value of the pension. In this way, trustees can reduce their future liability, with some savers reportedly being offered £900,000 payoffs on a £45,000 a year pension.

It sounds good, but there are risks involved in leaving a direct benefit scheme as the entire fund is transferred to a self-invested personal pension or an offshore QROPS, both of which are direct contribution schemes. With these schemes, there is no guarantee of lifetime payouts or index-linked benefits as they are based on the funds’ investment performances, and there’s a chance the UK’s Financial Conduct Agency may block transfers from direct benefit schemes in the future. Its as yet ongoing enquiry seems to show a majority of such transfers seem to provide no benefits to retirement savers.