Carillion pensions fallout: Four things DB members should think about

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"The high profile failure of Carillion and the fact that all 27,000 members of the group’s various defined benefit (DB) schemes will likely go into the Pension Protection Fund (PPF) will bring the viability of DB pensions into sharp focus once again," says Tom Selby, senior analyst at AJ Bell.

“With the scheme sponsor in such severe distress, many members of the Carillion pension schemes will inevitably be considering whether they should transfer out to a defined contribution (DC) plan. Such cases also have a ripple effect as members of other DB schemes become fearful about the ability of their employer to survive long enough to pay the pension benefits they have been promised.

“However, there are four important things people need to consider before ditching their DB pensions.

1. This isn’t an ‘all or nothing’ choice – the PPF will pay at least some of your pension

“Carillion members and anyone else considering transferring their DB pensions need to remember that the PPF provides a valuable backstop in the event of the scheme sponsor failing. For those who have yet to retire the lifeboat fund will pay 90% of the benefits promised, with the amount paid out each year capped at £34,655.05.

“Pension payments related to employment from 5 April 1997 will rise in line with inflation, subject to a ceiling of 2.5%. Payments relating to service before this date will be frozen.

“Furthermore the PPF is in a strong financial position, with its latest accounts showing it holds a surplus in excess of £6 billion– significantly larger than the Carillion scheme’s last reported deficit of £587 million. While there is no guarantee the PPF will retain this surplus in the future, it is well funded as things stand.

“So it isn’t a case of transfer your DB pension today or potentially lose everything tomorrow, and members should consider this carefully as they weigh up their retirement options.”

2. Don’t be flustered by the DB pensions noise

“In the wake of the problems that have hit members of the BHS, British Steel and now Carillion DB schemes there might be a temptation for members of other, unrelated DB schemes to jump ship too. The Carillion case in particular risks unnerving DB members given the surprise nature of its huge profit warning in July 2017.

“However, the reality is these are three very different situations which don’t necessarily represent a toppling of DB dominoes. Clearly an environment of persistently low gilt yields has increased the pressure on firms supporting schemes with a DB deficit, but providing these companies have strong profits and cashflows – combined with a robust plan to deal with any outstanding deficit – there is no reason for members to run for the hills.”

3. Second-guessing the future is a fool’s game – focus on your own retirement goals instead

“Quitting a DB pension is a huge decision – in fact there’s a fair chance it will be people’s largest financial asset. As a result members could be wooed into transferring by six-figure transfer values that probably feel a bit like a lottery win. However, anyone considering accepting such an offer needs to consider what their retirement goals are, how much money they need and the risks they are willing to take.

“There are, of course, perfectly logical reasons to transfer. For someone in serious ill-health, for example, an enhanced annuity might pay a larger income stream than their DB benefits promise. Equally, those with other sources of secure income might prefer the flexibility of DC, or simply prioritise passing funds on after death in a tax-efficient way.

“But it remains the case that staying in the DB scheme will be the most suitable course of action for most people.”

4. Only deal with qualified, regulated financial advisers

“Sadly whenever a DB scheme faces difficulties, sharks looking to fleece people out of their hard-earned retirement savings will inevitably circle. These people might contact you through cold-calling or via the internet, and often promise outlandish returns on investments if you move your money to them.

“Anyone looking to quit a DB scheme worth more than £30,000 is required by law to speak to a regulated financial adviser before doing so. You can shop around for an adviser to help you decide what to do using websites such as ww.unbiased.co.uk.

“You should go into this conversation with an open mind. While clearly the cash sums on offer are tempting, a good adviser can help make sense of this complicated picture and explain the different options open to you.

“The Pensions Advisory Service, which provides independent retirement guidance, has also set up a dedicated phoneline for Carillion members unsure about their options*.”

*The TPAS number for Carillion members is 0207 630 2715

These articles are for information purposes only and are not a personal recommendation or advice.


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Written by:
Tom Selby

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.