Investment for Expats
A good company pension scheme was one of life's little luxuries. If you were fortunate enough to have a civil service pension, a military pension or even better, an MP's pension then life was really good. This view was based on seeing tens of thousands of people with these types of pensions enjoying their retirement.
But times have changed and whilst these pensions are still excellent pensions, there are risks which have built up in the pension system. These risks are especially relevant to expats who have a final salary pension scheme.
We feel that people should be aware of these risks.
Final salary schemes in the UK are protected in the case of a default by the Pension Protection Fund. There is a common misconception that this is a Government provided fund. It is NOT. Whilst it was set up by Statute (ie by the Government) the funding of the scheme is provided by the remaining final salary pensions bailing out the ones which have gone into default. This means that the last scheme standing has to pay for all the others that have defaulted before. If there is only one or two schemes then this is sustainable. If there is a systemic problem, it is not workable.
The Pension Protection Fund (PPF) itself has just issued a report in which it confirms that 5,345 final salary pension schemes are in deficit. To be fair, that does not mean that they will all default.
Yet in September 2011 there was a marked change in the situation, of course, not helped by the euro crisis. This chart from the PPF shows how liabilities have rocketed and the value of assets fallen.
The change in the amount of shortfall between assets and liabilities of these particularl pension schemes is shown in the table below.
Funding Comparisons: September 2010 August 2011 September 2011
What this table shows is that the total amount needed to secure final salary pensions is 196.4 Billion pounds. In theory, this should be paid from the other schemes, yet of those schemes, 5,345 of them, are themselves in deficit.
If these schemes cannot cover the deficit, who will? Normally we would expect, in the last resort, the Government to cover the shortfall. However, in the context of the other calls on Government funding for the banks, Europe etc is it valid that they could cover the liability?
We do not know the answer to this but we feel that you should be aware of this problem.
If you would like a review of your personal situation please send an email using the link below