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Official figures have revealed that pension funds have plummeted a further £25 million into the red. The fall in bond yields – on which pension funds rely – has increased the pressure on the pots available to support final salary scheme pay-outs. At the end of May, the pension backstop PPF (Pension Protection Fund) revealed that the roughly five and a half thousand pension schemes it monitors have a combined deficit of nearly £295 billion. This is almost £25.5 billion worse than a month earlier.

Fears for the robustness of pension pots have been highlighted by the widely reported BHS deficit.  They come as a separate study reveals some of Britain’s biggest companies are paying shareholders a dividend bonanza despite huge deficits of their own. The Pensions Regulator have issued a similar warning in the past, saying: ‘It is important that employers treat their pension scheme fairly. We expect trustees to question employers’ dividend policies where debt recovery contributions are constrained.’ 

There’s quite a buzz around pensions at the moment – and rightly so, as they provide the backbone of our income in our later years. But currently, pension deficits are hitting the news, and figuring them out can still prove difficult.

Pension deficits concern what are commonly known as “final salary pensions” or Defined Benefit schemes.   Final salary or defined benefit (DB) schemes are essentially occupational pension schemes that provide a set level of pension at retirement, the amount of which normally depends on your service and earnings at retirement or in the years immediately preceding when you retire. Because your pensionable salary is used as one part of the formula in order to calculate your pension, a final salary scheme is commonly referred to as a ‘salary related’ scheme. Two common examples of ‘final pensionable salary’ would be your last year’s pensionable earnings or an average of your last 3 years’ pensionable salary.

Recently, there have been high-profile failures of these systems, such as the folding of Monarch Airlines – and the collapse of their pension fund. Initially, it appeared that owners could still walk away with a profit (after new hands tried to turn the airline into a more accessible and “Ryanair-like” product) by offloading debts, and this included dropping the pension fund. Ironically, this was once a major credit to the business. The fund, which is now in the Pension Protection Fund (PPF), had been under speculation of being left short when the business first began to struggle back in 2014, after years of asset-stripping.