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Carillion highlights the issue of pension deficit
Posted on: 5th Mar 2018 by: CamOuse Financial Management Limited
The collapse of construction firm Carillion has been widely reported and it’s no surprise that high-profile cases such as these cause worry amongst employees throughout the UK as to whether their promised workplace pension will be delivered when the time comes.
Defined benefit (DB) pensions are based on either a worker’s final salary or their average earnings during their career. As such, those in a DB scheme should know exactly how much they will receive annually when they retire. Robin Ellison, the chairman of trustees of Carillion’s pension scheme, has suggested to a committee of MPs that Carillion’s defined benefit pension schemes had a funding shortfall of approximately £990 million by the time the company collapsed, a figure which is higher than many thought.
The Pensions Regulator said that, based on the information it had in July 2017, it could not justify stepping in to regulate Carillion’s case as there was not sufficient concern. However, this then begs the question of exactly how far in the red many other DB pension schemes are within the UK, and whether the 11 million people enrolled in them need to be worried.
The Pensions and Lifetime Savings Association (PLSA) conducted a major study and found that most DB schemes had sustainable models in place to ensure future payouts could be met. However, they also found that of those that did not, the three million savers enrolled in the schemes only had a 50% chance of receiving their promised payouts. As such, the PLSA said that the collapse of more high-profile pension schemes was a “real possibility”.
When a company goes bust, the Pension Protection Fund (PPF) steps in to make DB payments to workers. However, these may not be as much as some workers are expecting. In this scenario, those over the pension age will receive their full pension, and pension payments for those employed on or after 5th April 1997 will rise in line with inflation up to 2.5%. Workers under pension age will receive 90% of their pension up to a government-set limit, which varies depending upon your age. Carillion had 27,500 workers, both past and current, enrolled in fourteen DB pension schemes, all of which are currently being transferred to the PPF.
Those in defined contribution (DC) pension schemes have less to worry about, as they will have paid into a pension pot which can then either be used to purchase a retirement income or can be cashed in subject to tax. The employer also makes contributions to this pot, which stop either when the employee leaves the company or the company ceases to exist. However, the pot is still invested in the employee’s name ready for when they retire. If the employee gets a new job, they will usually start contributing to a new pension pot.
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Understanding the true cost to your business
Pension arrangements must be available for all employees. There are three categories of employee:
Eligible
Aged between 22 and State Pension Age (SPA) with qualifying earnings over the Auto Enrolment earnings trigger
Non-eligible
Entitled
Important Notes
- Eligible jobholders must be auto-enrolled
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- Entitled workers are entitled to join a pension scheme, but the employer doesn't have to contribute
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Qualifying Earnings lower threshold |
£5,772 |
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Qualifying Earnings upper threshold |
£41,865 |
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Automatic Enrolment earnings trigger |
£10,000 |
Minimum contribution level options:
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8% of Qualifying Earnings of which |
3% is employer's (starting at 1%) |
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9% of Basic Salary of which |
4% is employer's (starting at 2%) |
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8% of Basic Salary of which |
3% is employer's (starting at 1%) |
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(Where basic salary is at least 85% of total earnings) |
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7% of gross earnings of which |
3% is employer's (starting at 1%) |
Pay reference period
Essentially the frequency that the jobholder is paid e.g. monthly, weekly etc. but with reference to the tax month, week etc. therefore it may not be the same as the payroll period.
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Staging date
Based on the employer’s payroll size as at 1 April 2012 and can be found at www.thepensionsregulator.gov.uk/employers using your PAYE reference. The Qualifying Workplace Pension Scheme must be registered with The Pensions Regulator within 4 months of the staging date.
Compliance and communication
Postponement
Auto-Enrolment can be postponed for up to 3 months:
- For current eligible employees
- For workers that meet the criteria in the future for the first time e.g. avoid joining temporary or lower paid workers
Opt-Outs
All eligible employees must be auto-enrolled, but can, with the correct notification, opt-out within one month of joining the scheme and be treated as never having joined. They can opt back in and will automatically be auto-enrolled every 3 years in any case!
Communication
There is a wide range of information that must be provided to all employees at certain times, such as:
- The date auto-enrolment took place for eligible jobholders
- That non-eligible jobholders have the statutory right to opt in
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Contributions can be paid by effectively reducing salary, which saves on NI contributions, but employee must choose to do this – they cannot be forced, so a contractual variation will need to be implemented.
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