BHS Pension: how safe are Final Salary Pensions?


The BHS pension has hit the news again last week. Dominic Chappell, Director of Retail Acquisitions, the company that previously bought BHS for just £1, is being questioned in court after failing to provide pension scheme information to The Pensions Regulator.

Dominic Chappell acquired BHS from retail billionaire Sir Philip Green, who also faced harsh questions about a £571m pension deficit back in 2016. Eventually, The Pensions Regulator issued a notice to Sir Philip to pay towards helping to plug the enormous pensions gap, which left around 20,000 BHS employees facing cuts to their pensions.

How did the BHS Pension Scandal happen?

The £571m BHS pension deficit that’s often quoted in the press is how much it would cost to have an insurance company take on the liability for all those current and future pension payments. Now, it’s not uncommon for companies to have a pensions deficit, but as the organisation was in steep decline due to falling sales, the company lacked the funds to assure they could pay out in the future. When the company went into administration, the Pension Protection Fund became involved, but they only provide compensation of up to 90% of the amount BHS employees had been promised (and the amount can be capped for higher pensions too). Sir Philip Green then agreed to pay £363m towards the deficit. The Pensions Regulator is still investigating the two BHS pension schemes and the sale from Sir Philip to Dominic Chappell.

What does this mean for final salary pension schemes?

Final salary pensions – also known as defined benefit pensions – used to promise a secure income based on a percentage of an employee’s final salary on retirement, and they were often inflation proofed. However, due to increased pension regulation and a fluctuating economy, many businesses are closing their final salary schemes as they are proving too costly to provide. Instead, many organisations are moving their employees into personal, or ‘defined contribution’ pension plans, where there are no promised incomes involved and the employee simply builds up a pot of money for the future. The Pensions Regulator has also expressed great concern that other large organisations could find themselves in a similar predicament as BHS. Last year, the government proposed cuts to defined benefit pensions to ensure that schemes are still sustainable once people retire – for more information, please read our article, Cuts Announced for Defined Benefit Pensions.

It’s becoming increasingly important that employees fully understand the type of company pension scheme they have. If you need help checking your pension, then please talk to one of our financial planners for advice.

What can I do about my own final salary pension scheme?

If you have a final salary pension scheme, you may want to review whether it provides what you need. Ask your pension scheme administrators for more details (some of the bigger schemes have a dedicated pension scheme website which can be useful), or speak to a professional financial planner.

What are some of the differences between final salary and personal pensions?

• A final salary pension scheme (defined benefit pension) guarantees a secure pension income for the rest of your life, which usually rises with inflation. After your death, it will pay an income to your spouse (and children/dependants). Generally, the pension income is not flexible – once you’ve started taking your pension, you can’t change it. Tax-free lump sums are sometimes lower than a personal pension plan. You are relying on your employer to ensure the pension plan is well-funded.

• A personal pension plan tends to be more flexible in terms of accessing your pension income. Broadly speaking, you can take out what you want, when you want in retirement. This gives you the ability to take more income in your early retirement while you are fit and healthy, and less later in life when you may not need as much. It also gives you the ability to manage how you take money out of the plan so you keep your taxes down. And any money left in the pot when you die can be passed to whoever you wish, including children or charities. However, there is no lifetime income guarantee and if you don’t regularly review what you’re taking out of the pot, there is the risk it will run out. With a personal pension, it’s essential to have a sound financial plan that you review at least yearly.

For a direct comparison, please download our one-page final salary vs personal pension guide.

If you are worried about your final salary pension, please get in touch to speak to one of our financial planners. Our team can carry out a full pensions review and will provide expert advice to help put your mind at rest.