Savers in the supermarket giant Tesco’s retirement scheme may have trouble in store as the company’s pension black hole has swelled to £5 billion.
Tesco is the latest FTSE company to reveal a huge pension deficit and more surprises may be on the way as other FTSE100 firms with final salary pensions expect to see their payments and liabilities to leap to £14 billion within three years.
Final salary pensions offer a guaranteed retirement income based on a worker’s length of service and level of earnings before giving up work.
Besides Tesco, other big firms with pension issues include Tata Steel, which has 130,000 pension members and John Lewis, the department store and Waitrose supermarket giant.
Tata Steel has asked the government to make special arrangements to reduce the £15 billion deficit to smooth a deal to merge the firm’s UK business with another European producer.
John Lewis and Tata Steel problems
John Lewis has a £1.5 billion deficit, but is unlikely to close the scheme as staff are partners in the business and are unlikely to vote that they should lose gilt-edged retirement benefits.
John Lewis has paid £1.35 billion into the pension scheme to fund payments and to keep the deficit in check over the past five years.
Pension and business experts say pension debts will keep growing while interest rates and bond yields are at historic lows.
For FTSE firms, this means pension commitments are sucking up working capital and investment cash badly needed to maintain competitiveness.
Many FTSE firms are offering workers big cash pay-offs to leave their final salary schemes.
QROPS option for expats
However, moving pension funds to a personal pension means losing guaranteed benefits as they are based on investment performance.
For expats with a final salary scheme, another option is a Qualifying Recognised Overseas Pension Scheme (QROPS).
These offer all the features of a UK based SIPP plus extra tax and investment options only available offshore.
A larger tax-free lump sum is the headline attraction – set at up to 30% of the fund, rather than the 25% paid onshore.
Other features include gross payments with income tax deducted in the country where an expat lives, if there is any; the chance to have payments made direct to an expats bank denominated as local currency and often better access to unspent funds for loved ones.