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Category: Economics

More pension schemes could fail if the UK gets a hard Brexit

Large pension schemes could be at risk if Britain leaves the Single Market, former minister for pensions Baroness Altmann tells Glint Follow...

15 January 2018


Large pension schemes could be at risk if Britain leaves the Single Market, former minister for pensions Baroness Altmann tells Glint

Following the collapse of construction firm Carillion, former pensions minister Baroness Ros Altmann, has warned of further pension scheme failures as a result of Brexit. Altmann told Glint that while Carillion’s demise had nothing to do with Britain exiting the EU, other large firms were at risk and the government must “wake up to the enormous, huge, dangers of a hard Brexit”.

Altmann, who served as minister of state for pensions under David Cameron and Theresa May, said she was confident the Carillion pensioners would see much of their pension replaced by the Pension Protection Fund (PPF). The fund has budgeted for some big schemes to fail and can manage the onboarding of all Carillion’s pension schemes, although future increases will be lower she said. “However those not yet at pension age, or who took early retirement, may lose at least 10-20% of their promised pension.”

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What is of greater concern, says Altmann, is the potential of systematic risk to large pension schemes, emanating from the potential negative economic impacts of Brexit. “If some of Britain’s largest manufacturing firms face failure as a result of a hard Brexit, [this] could undermine our automobile or chemical sectors in which defined benefit schemes have been prevalent. If too many of those businesses suffer as a result of leaving the Single Market and Customs’ Union then the PPF could face difficulties that might even result in reduced benefits for workers covered by the insurance.”

The PPF currently acts as a safety net for the failure of large pension schemes and is paid into via levies on pension schemes it covers. But its capability is not unlimited says Altmann, pointing to the pressures large firms could be under if they are denied access to the Single Market. If this leads to numerous big failures many thousands of jobs, as well as many thousands of pensions, could be lost. “The manufacturing sector is not just the jobs in the companies themselves, but in all the small businesses that supply those companies – If that were the case the PPF would be swamped.”

“The PPF is well funded, and covering one big scheme [Carillion] is not going to be a major problem. But if too many schemes fall into it, it won’t be able to cope and it will have to cut benefits. It’s potentially a systemic risk,” said Altmann.

“Brexit is a big risk to defined benefit pensions as a whole, but if we stay in the Single Market and the Customs’ Unions that risk is mitigated to a significant extent. The real problem is not knowing whether we will be able to stay and not knowing how to value the employer covenant in that environment. The trustees of these big companies are sitting on a potentially enormous risk and there’s nothing they can do about it. It’s not something they can foresee.”

“I hope the Carillion situation will be a wake-up call for the Government to take the threats and risks seriously of leaving the EU without securing the integrated supply chains and regulatory standards alignment that our large industrial companies depend on,” she added.

However, Brexit should not be seen as the only potential threat to pensions. Glint spoke to one wealth manager who was more critical of the role of defined benefit pensions. Such schemes often come at great expense to a company’s balance sheet, they said, citing the “empty cheque book” of many final salary offerings. Sadly, the Carillion failure was a “sign of the times” they claimed, pointing to the serial mismanagement of big firms. “People need to plan,” they said. “You can’t just throw it in the cupboard and forget about it or you could wake up on your 65th birthday with nothing.”

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