Should I transfer out of a final salary pension that might go bust?

I currently have part of my retirement savings accrued with a final salary pension scheme in the private sector.

Due to the employer’s ongoing financial issues, the scheme is already severely underfunded. 

However, I have received a letter from the scheme which said it might need to be taken over by the Pension Protection Fund.

Following this information I requested a transfer value and projected retirement forecast which came back as £58,000 transfer or a defined benefit forecast of £5,000 a year payable at 65 (I am currently 54).

If the scheme does move to the PPF then I understand I would be due 90 per cent of forecasted income? In my mind I feel that I have time to improve this retirement savings by transferring to another scheme for security and the potential for further growth.

Due to the pension scheme being defined benefit I would need the written agreement of an independent financial adviser before I could transfer funds out. However, I am unable to find one willing to help.

I appreciate moving funds from a defined benefit scheme is usually not advisable but given the risk around the scheme is there not a case for an exception? Am I really now trapped in a failing scheme with my money at risk?

Got a question? Email: pensionquestions@thisismoney.co.uk

Steve Webb replies: For most people who are members of traditional ‘final salary’ type pensions, the security of those pensions has improved considerably in recent years.

But, unfortunately, there is still a minority of schemes where there may not be enough money to meet the pension promises which have been made.

Ultimately, what matters in schemes like this is two things – the funding level of the scheme and whether the employer who sits behind the scheme can make up any shortfall over time.

In your case it sounds like the ‘perfect storm’ – an underfunded scheme combined with a struggling employer.

As you say, in the event that the company goes bust at a time when there isn’t enough money to meet all the pension promises, the Pension Protection Fund will step in.

In this case there are two main possibilities.

1. If the scheme is seriously underfunded, and doesn’t have enough money even to match PPF compensation levels, then the assets will transfer tothe PPF.

Baseline PPF compensation is 100 per cent of pension for those over pension age and 90 per cent for those – such as yourself – who are under pension age.

Pension increases and death benefits under the PPF are also often less generous than typical scheme benefits.

2. If the scheme has enough money to secure pensions better than PPF compensation but below full pensions (a so-called ‘PPF plus’ case) then the money will pass to an insurance company who will underwrite this level of payments in future.

It is entirely understandable that you are worried about the security of your pension and are thinking about transferring out into a ‘pot of money’ type arrangement.

But, for reasons I will explain, this is not a ‘get out of jail free card’ that will necessarily put you in a better place. This is for a number of reasons.

The first is that the trustees of the scheme have a duty to treat all members fairly.

In particular, if the scheme is struggling and you were allowed to transfer out with the full value of your pension, then this could make matters even worse for those left behind.

In this situation the trustees may reduce the transfer value on offer.

Even with a standard transfer figure, there is no guarantee that you could invest the transferred pot in a way that generated a lifetime pension as good as the scheme (or even the PPF) would provide.

But if the transfer value has been scaled back, this becomes even more difficult.

A second issue is that for any transfer of over £30,000, the Government requires you to take financial advice.

Personally I think this threshold is now far too low, and cases like yours show why. A financial adviser – even if you could find one – would typically charge thousands of pounds to give this kind of advice.

This is partly because it is complex advice requiring a lot of judgment – it’s not just a case of signing a form – and partly because the risk of complaints and potential challenge is high.

As a result, the fees for advice would take a further chunk out of your transfer value, making it even harder to match what you were originally promised.

Third, whilst you obviously face considerable uncertainty about your current pension, if you transfer out you will face a different kind of uncertainty.

Your transferred money will be placed into a ‘pot of money’ type pension which is subject to the ups and downs of investment markets, and whose value can be eroded by inflation.

You also have the issue that your old pension would have paid out as long as you live – even if you lived to 100 – whereas your new pot could run out if you live a long time.

In short, even if you can find an adviser, a transfer out is not automatically in your interests.

Depending on the funding level of your current scheme, in some scenarios you might end up getting more pension by staying put – even if the scheme ends up in the PPF – than by transferring out on the terms you have been offered.

But this is a difficult judgment and that is why you will not be able to go any further without an independent expert considering your individual circumstances and all the points that I have made before advising you on the best course of action.