Last week, the British Government published a series of documents offering guidance for individuals and businesses looking to avoid disruptions in the event of a no-deal Brexit. This term refers to the scenario in which the UK exits the European Union (EU) before a deal can be established between the British Government and the European bloc. News outlets worldwide have increasingly been reporting that a no-deal Brexit is now the most likely outcome of talks between Westminster and the EU. Roughly 54% of Brits expect a no-deal Brexit to go ahead, with uncertainty facing numerous financial sectors including the security of final salary pensions.
A final salary pension is an occupational retirement savings scheme that provides a set level of payment upon retirement. This is usually reflective of your final salary with your employer, or the amount you earned in the years leading up to your retirement. It can also include additional non-monetary imbursements such as death and service and healthcare benefits. Once a staple of the pension sector, final salary pensions are increasingly few and far between, as employers struggle to meet the increasingly demanding liabilities of their own bloated schemes.
How Would Brexit Impact Pension Performance?
UK workplace pensions are determined by the performance of the country’s economy. A company providing a large-scale final salary pension scheme to thousands of existing and future pensioners could face sustainability problems if its profit margins were to significantly drop. Economists have forecasted varying outcomes to a no-deal Brexit, but the common consensus is that the UK’s economy will suffer in the short term. Companies may be forced to close final salary pension schemes if they are no longer feasible in an underperforming economy.
The UK has witnessed this scenario pan out already in the Tata Steel pension transfer debacle. Faced with significant losses in the UK, the India-based Tata Steel corporation threatened to close its UK branch of operations due to unsustainable pension liabilities. The British Government offered Tata Steel an alternative option, which led to the closure of the British Steel Pension Scheme (BSPS).
Speaking after the Government’s papers were released, the director of regulation at the Association of British Insurers said:
‘Leaving the EU without a deal would cause major inconvenience to millions of pensioners…We urge the government to agree a deal as a matter of urgency.’
It is impossible to accurately predict the impacts of a no-deal Brexit on individual companies. However, after hundreds of thousands of pensioners were conned into transferring out of their BSPS scheme into underperforming self-invested personal pensions (SIPPs), the fear over long-term final salary pension stability in the UK is very real. Despite more robust regulations and scrutiny from the Financial Conduct Authority (FCA) and the Pensions Regulator, a repeat scenario of the Tata Steel scandal is still a real possibility whilst un-regulated introducers, unscrupulous financial advisors and product providers are still trading in the short term.
Money and Me Claims and Final Salary Pensions
At Money and Me Claims, we agree with the FCA that engaging in a final salary pension transfer is rarely in your best interests. Unfortunately, opportunistic service and product providers have taken advantage of unstable market conditions before. Read our outline of the BSPS situation if you would like more information.