UP to three-quarters of companies, many of them in the FTSE 100 of Britain’s
biggest businesses, are considering offering cash “bribes” to workers who
agree to quit their final-salary schemes, despite attempts by the government
and regulators to clamp down on the practice.
Many experts believe that the trend could lead to another pensions mis-selling
scandal similar to that of the 1990s, when millions of people were wrongly
advised to leave their company schemes for personal pensions.
Research from Watson Wyatt, a consultancy, shows 75 per cent of companies are
considering containing their pension deficits by such measures as breaking
the link between members’ benefits and salaries, or offering inducements to
people who transfer out.
Advisers say there has been a sharp increase in people being offered these
deals and seeking help. Tom McPhail of Hargreaves Lansdown, a pensions
adviser, said: “We have seen an upsurge in inquiries in the past few months.”
Intelek, the electronic-systems manufacturer, reduced its pension deficit by
£4.5m by luring members out of its final-salary scheme with cash sweeteners,
a practice known as an enhanced transfer value (ETV) programme. Other listed
companies such as Spirent Communications, a technology firm, Kiln, an
insurance underwriter, and Berkeley, the housebuilder, have all introduced
similar programmes.
Rentokil Initial was the first FTSE 100 firm to close its final-salary scheme
to existing members, switching them into a money-purchase plan because of
spiralling pension costs. WH Smith, the high-street retailer, has announced
similar plans.
With an ETV scheme, the trustees pay a lump sum, called a transfer value, into
an alternative pension scheme. This is supposed to be equivalent to the
final-salary benefits that the member is giving up. It is usually sweetened
with a cash lump sum on top from the employer to tempt people.
These cash-in-hand deals, which can often be worth tens of thousands of
pounds, may appear tempting, but experts say in the long run they generally
offer a poor deal.
In January, Revenue & Customs ruled that it would tax all cash-in-hand
inducements in a bid to make the deals less attractive, but it does not seem
to have discouraged employers from offering them.
The Pensions Regulator, the body that oversees workplace pensions, has also
warned that trustees have a duty to blow the whistle if members are offered
payments that are worse than the benefits they have given up.
However, McPhail said that in virtually all of the cases he had looked at, the
members would have ended up worse off and were therefore advised not to
transfer out.
Stewart Ritchie, president of the Faculty of Actuaries, is concerned that
people are being dazzled by the offer of money today without considering the
impact on their retirement prospects. He said: “The costs of replicating
your benefits outside a final-salary scheme may be much higher than the
transfer values offered, even with the inducements.”
With a defined benefit or final-salary scheme, you receive a pension based on
your earnings at retirement, but if you move into a personal or
money-purchase pension, your retirement income is based on stock-market
performance. You therefore run the risk that your fund will not meet your
expectations, whereas with a final-salary scheme your employer carries all
that risk.
You may also lose benefits such as a widow’s pension and incapacity benefit in
early retirement. In most cases the transfer value plus the sweetener are
insufficient to buy such benefits from an insurance company. Investors
typically need returns of 8 per cent to 10 per cent a year to replace what
they have lost but, according to Barclays Capital, over the past 50 years
the annualised average return from equities has been 7.1 per cent in real
terms.
In one case, a 52-year-old was offered a transfer value of £180,000 plus
£50,000 cash lump sum from her former employer, for her £230,000 pot, which
she accepted.
Advisers would not have recommended this because of the growth rate required,
about 10 per cent a year, to match the scheme benefits she was giving up.
She also lost benefits such any dependants’ pensions.
There may be good reasons to take up an offer from your employer. If you are
concerned that it could go bust, for example, it may be your best option.
But you should always seek independent advice.
The Pension Protection Fund, set up to cover wound-up schemes, covers only 90
per cent of the pensions of members who are still working, up to a limit of
£26,050 a year.
If you are years from retirement and are comfortable taking your chances with
the stock market, you might also end up better off with a personal pension.
This is especially true if you are a big earner.
In general, however, advisers say you should think extremely carefully before
accepting a transfer offer.
The combined pension deficit in the UK has actually improved over the past
year, having fallen from £48 billion to £26 billion, according to Aon, a
consultancy.
Despite this, more companies are still expected to water down their
final-salary schemes. Marcus Hurd of Aon said: “UK pension funds continue to
experience a very unstable period, which has been caused by a combination of
jittery stock markets and volatile bond yields.”
When global stock markets nosedived in late February this year UK pension
deficits rose by £11 billion in just one day — the highest single-day rise
since June 2001.
If your company decides to address its pensions deficit by offering an ETV
scheme, seek professional advice as soon as possible.
