There are many companies in the UK which are currently facing a crisis over pension deficits. These companies provided a lifetime guarantee of income to their employees over 30 years ago, but the cost of funding these schemes is starting to impact the companies severely.
Some of the companies which have accrued a significant pension deficit include House of Fraser (£100 million), Dixons Carphone (£500 million), and John lewis (£731 million). In order to function effectively, a pension fund needs a business to be performing well enough to afford it. However, this is currently not the case in the retail industry.
There are many factors which have influenced this incapability to provide a pension scheme. It is an indisputable fact that people are living longer, which means that the cost of providing income for people has grown exponentially. Also, lower interest rates combined with high inflation leads to more capital being required to fund a pension scheme. Retailers who existed before the boom of the online market have seen their profits waning against companies which have adapted better to online shopping. There are many other industries which have a far more stable environment, whereby investing in their pension schemes is less of a risk.
The collapse of BHS demonstrated the reality that a retailer would not necessarily guarantee a complete pension if it suddenly dissolved. Aside from the Pension Protection Fund (PPF), there are no other established safety nets in place, and it’s largely down to the employee to protect their own pension.
In May 2019, John Lewis announced that they would no longer be linking their pension scheme to final salaries in an attempt to save £80 million each year. It attributed these measures to a slowdown in consumer spending, which has already forced the closure of many stores around the country and staff to be laid off. John Lewis also linked these actions to the uncertainty surrounding Brexit. Prior to this, John Lewis had matched all pension contributions up to 4.5% and offered 1/120th of an employee’s salary even if they had not contributed towards their pension.
John Lewis is not the only retailer to have closed their defined pension schemes, Morrisons and Tesco closed their benefits schemes many years ago. However, John Lewis was deemed to be one of the best retailers in terms of providing for their employees upon retirement, so the closure of the scheme takes on more significance.