I have a defined benefit pension from a former employer and read over the weekend some stories about the Government wanting to allow firms to raid workers’ pensions. Surely this can’t be right? What happens if the government allows this and then it all goes wrong? Will we never learn? And, most importantly, how worried should I be as a member of a defined benefit scheme?

Anonymous

Tom Selby, AJ Bell Head of Retirement Policy, says:

At this stage, there is absolutely nothing for you to worry about because the Government hasn’t proposed anything in this area. It has issued a call for evidence on ‘Options for defined benefit schemes’ which raises the issue of pension scheme surpluses.

A defined benefit pension scheme promises to pay you an income based on your years of service and salary. A ‘funded’ defined benefit scheme is required to publish details of both assets and liabilities. In this situation, liabilities are simply the scheme actuary’s best estimate of the cost of paying promised pensions to all scheme members. If the estimated liabilities are valued higher than the scheme’s assets, the scheme is deemed to be in ‘deficit’. If the assets are worth more than the liabilities, the scheme is in surplus.

A number of things can impact a scheme’s funding position, but one of the key factors is movements in gilt yields, which have a sizeable influence on the accounting value of liabilities. This is because defined benefit schemes invest in gilts to pay the incomes they have promised to members.

When gilt yields go down, there is less money coming into the scheme to pay its liabilities. Conversely, when gilt yields go up, there is more money coming in to pay out to pensioner members.

None of this affects your entitlement to a retirement income – it’s just the way defined benefit accounting works in relation to liabilities.

While there have been stories about employers potentially being allowed to access any surplus they have early, there is nothing concrete yet. There are several protections that exist within the defined benefit system which should give you some comfort.

First, your defined benefit scheme is looked after by independent trustees with a legal duty to ensure decisions are made in your best interests. Second, even in the catastrophic scenario of a defined benefit scheme sponsor going bust, the Pension Protection Fund is a valuable lifeboat fund which should ensure you get a decent chunk of, if not all, your promised pension.

If we get more detail or some formal proposals on giving firms flexibility to use surpluses, we will return to this subject in Shares.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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