Large airline companies may be teetering on the edge of insolvency but employees with a ‘final salary’ pension can be assured they will not lose their life savings, pension experts have said.
The spread of coronavirus has forced countries to tighten borders, with Dominic Raab advising British nationals to avoid travel for 30 days.
The measures have battered the airline industry, leaving giant companies such as International Airlines Group – owner of British Airways – fighting for survival.
This could push businesses with huge pension schemes into financial distress. British Airways’ final salary pension scheme has 23,250 members in 2019 with assets of £7.9bn. Other airlines such as Norwegian have warned they are “within weeks” of collapse while Europe’s biggest airline Lufthansa confirmed it will seek “liquidity”.
Thousands of businesses across the country could face closure over the coming months due to the economic impact of coronavirus.
So what does this mean for staff who have been saving into their pensions?
One cold comfort for employees in final salary or "defined benefit" pensions schemes is that they are not at risk of losing their pension savings.
The Pension Protection fund (PPF) acts as a safety net for pension savers by guaranteeing to pay their pensions if their employer fails.
A spokesperson said the organisation can take on an unlimited number of cases, as they prepare for a spike in the next few months.
They said: “While the current market turmoil is highly challenging, we remain confident our sustainable funding strategy and diverse investment approach ensures we are well equipped to weather the current market volatility and future challenges.”
The fund promised to provide compensation for “as long as it is needed” thanks to contingency plans that have been put in place to ensure members are protected and will continue to receive their payments as normal.
If you become a member of the PPF and you are over the pension age of the scheme then you will receive 100pc of the pension in payment when the company enters insolvency.
However, if the member is under the pension age or retired early then they will receive 90pc of what they were promised. This is currently subject to a cap of £40,020 per year at age 65.
Tom McPhail, of fund shop Hargreaves Lansdown, said the PPF will face added pressure but there should be no concern about the scheme’s ability to take it all on.
Mr McPhail said: “The whole scheme has been well run from the outset and was on its way to be self funding so it is pretty solid. It has put itself in a good position to manage the challenges it is facing today.”
The fund currently has £32bn in assets and has reserves of £6.1bn that can be used for payouts when companies go under.
The PPF had aimed to be self-sustaining by the 2030s, at which point it would not need any more levy funding from members. However, this could change.
Sir Steve Webb, partner at pension consultants LCP, said there are “safety valves” designed to keep the PPF afloat in extreme circumstances that it could rely on. This includes pushing back its target date for being self-sustaining and instead collecting levies well into the 2030s.
If the fund came under “extreme pressure” it could reduce payments to retirees, possibly on a temporary basis, by freezing payouts rather than increasing them annually as it does now, Sir Steve said.
He added: “One possibility to reduce pressure on the PPF would be for the Government to effectively nationalise the pension funds of insolvent companies.”
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Kate Smith, of pension provider Aegon said savers who are concerned about losing their pension money should be reassured that the PPF will be able to protect them even in a case of a quick succession of companies going under.
“Many companies went bust in a small space of time in 2008 and the PPF was able to assume the assets of companies and continue paying out,” she said.
The PPF currently has more than 260,000 members.
Your company’s pension scheme will not automatically fall into the PPF if it goes bust, there is first an assessment period which usually lasts between 18 and 24 months.
During this time, the fund assesses the financial position of the firm. If the scheme is able to provide its members with a pension above what the PPF pays through the restructuring and insolvency negotiations then the scheme will not transfer into the PPF. However, if there are insufficient funds to cover the costs then it will fall into the fund.