Under new reporting rules two in 10 people are about to find out that if their company pension scheme was wound up tomorrow they would only get half their pension entitlement.
The Pensions Act 2004 requires most pension schemes to send summary funding statements to members by 22 September.
The statements must outlinine the scheme’s funding position in relation to the cost of securing benefits with an insurance provider, which will manage funds owed to members if their employer winds up the scheme.
This is the first time trustees have had to reveal the proportion of members’ benefits that are covered by assets – a measurement known as the ‘funding level’.
The statements must show two calculations: the funding level calculated on an ‘ongoing’ basis as set down by scheme trustees, and one allowing for the cost of securing benefits with an insurance company.
Schemes that are 100% funded on an ‘ongoing’ basis are typically around 60% funded in reality, because trustees base their calculations on the ongoing solvency of the company rather than the actual assets it holds.
Calculations by Mercer HR Consulting show that one in five members of company pension schemes will learn that they would only receive 50% to 60% of the benefits they expect if their scheme was to wind up immediately.
About three in five will discover that they would get 60% to 70% of their benefits, while just one in five would get more than 70%.
Dr Deborah Cooper, principal at Mercer, said the statements could come as a shock to many members, as it is rare for trustees or companies to disclose their schemes’ funding positions in this way.
“While trustees should not try to sugar-coat the numbers to make them more palatable, it is important they put them into context for members,” she said.
“The statements represent a snapshot of pension schemes at a particular date, and the shortfalls in most schemes will continue to reduce over time.”
Mercer calculates that more than 10 million funding statements will be issued by private sector employers.
About one fifth will be sent to existing members, while about four million will be issued to pensioners and the same to deferred scheme members.