Revealed: Pension plans beyond repair

As such there is an abundance of employers cutting their losses and cutting a cheque to each employee for the accrued funds to date. This leaves employees looking for a private pension fund or an alternative method to saving for that elusive retirement.

The choice of whether or not to continue an employee pension scheme has been a very real and costly quandary for many businesses in recent years. When revenue fails to meet the associated costs with running a scheme, many businesses have opted to freeze their schemes. Even a rise in profits is often not enough to keep up with the demand of offering a scheme for all employees. After all, the take up may be minimal in the first year a scheme is in operation but a company must be able to fund its contributions if all employees take up the scheme. They also must be able to see this commitment through. The choice, however, can come down to ceasing a pension scheme or redundancies. Many individuals do not consider the risks involved in a company pension scheme. In fact, many do not scrutinise the scheme as much as they should – choosing to trust the choice their employers have made.

The freezing of a company pension scheme will entitle each member of the scheme to keep the funds they have accrued to that date, but the scheme will not earn any more. Most people choose to transfer their pension scheme at this stage but it is often difficult to find a scheme which will offer comparable benefits. For those who are nearing retirement age it can be incredibly difficult to recoup their losses.

The difficulties are being felt everywhere. Research conducted by KPMG has found that a third of pension schemes operated by blue chip companies are currently drastically underfunded. Profits have been knocked by the global economic crisis which has had an effect on these firms’ ability to pay out on final salary schemes. Deficits are such that, according to KPMG’s research, one in three blue chip firms are unable to “payoff deficits in any realistic time frame from discretionary cash flow.”

KPMG’s Pensions Partner, Mike Smedley, believes that the solution lies in bolstering the business of these companies. This will, in turn, strengthen the economy and the ability of these businesses to continue to host these pension schemes for their employees. He recommends against FTSE businesses refusing to pay out dividends due to pension payouts. Mr Smedley commented: “If a business says to its shareholders we’re not going to pay any dividends until we’ve met our pensions deficit, their share price probably collapses, the banks won’t lend to them, they can’t invest in the business and then they might struggle to make the profit to fund the pension scheme – potentially.”