Will my final salary pension be affected by the coronavirus crisis?

I have a final salary pension. Will it be affected by what is going on now with the coronavirus?

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Steve Webb replies: The good news is that, provided your former employer stays in business, your pension should be safe.

But there is a lot currently going on behind the scenes in the world of final salary – also often called ‘defined benefit’ – pensions which it might be useful to be aware of.

If you are in a public sector scheme, such as those for teachers, nurses or civil servants, you have nothing to worry about.

Most public sector schemes are funded out of taxation, so things like movements in stock markets or companies going out of business will not affect whether your pension is paid.

But assuming you worked in the private sector, your pension promise is backed by a fund which has been set aside to pay your pension, and those of your fellow workers, today and into the future.

That money is overseen by a group of trustees who have to make decisions about how best to invest the money and how the scheme should be run.

Every three years, your scheme goes through a valuation process. 

They look at all the pensions that are due to be paid over the coming decades and compare this with the returns they expect to get on the money that sits in the fund.

If there is a shortfall (or a ‘deficit’) then the Pensions Regulator will expect the scheme to come up with a plan for dealing with it. This is known as a ‘recovery plan’.

It usually involves the employer agreeing to make additional payments over a number of years until the deficit is closed.

The impact of coronavirus on all of this will vary from scheme to scheme. Where schemes were invested heavily in shares, the recent stock market falls mean that the assets held by the scheme will have dropped.

Really low interest rates are also bad news for company pension schemes. This is because if returns are low, you need to set aside more money now to pay for future pension promises.

These two factors together mean that for many schemes, deficits are now likely to be much bigger as a result of the current crisis.

Normally, when deficits go up, employers have to put extra money into the pension fund. But, at the moment, many employers have very little cash.

So the Pensions Regulator is allowing employers to put off making payments into schemes for a three month period if necessary.

As long as this doesn’t go on for too long, it should be possible to make up for lost time and get the pension funding level back up.

But if the economy takes a long-term hit then a combination of increased deficits and reduced contributions is storing up problems for final salary pension schemes.

The big problem would be if coronavirus means that your former employer goes out of business, perhaps because they are in a sector of the economy which has been hardest hit.

If this were to happen at a time when the pension scheme did not have enough money set aside to pay all of its future pensions, then the chances are you would see some impact.

If the pension scheme was significantly short, it would be likely to end up in the ‘lifeboat’ Pension Protection Fund, assuming your scheme was registered in the UK.

You can read more about the PPF here, but in brief, the PPF would take over all of the assets of your pension scheme and would then pay benefits out to you from now on.

The basic level of payment would be 100 per cent of your pension if you were over scheme pension age when the firm went bust and 90 per cent if you were under.

There are also limits on the pensions which would be paid out to the highest earners.

The main difference you would see in future would be that annual increases for inflation could well be lower if the PPF is paying your pension rather than your old scheme.

But at least you have the security of knowing that the PPF is there and you cannot lose all your pension.