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What is a scheme deficit?
A 'scheme deficit' occurs when a salary-related pension scheme does not have enough assets to pay for all its future possible liabilities. Either the employer will have to make additional payments to make up the deficit, or the trustees will have to find some other way of reducing the deficit such as cutting benefits, increasing member contributions, or even closing the scheme for future accrual.
There are different ways of measuring the deficit, and a legal requirement to reduce any deficit over time. This legal requirement has changed a number of times in recent years as government has tried to get the right balance between protecting members' future pensions and not putting so heavy a funding obligation on employers as to encourage them to close schemes.
Stock markets and other investments can go up and down quite sharply. Pension deficits can reflect this. There is no need to panic if your scheme has a deficit if you work for a secure employer with a long-term commitment to reducing the deficit. A large deficit in a more precarious company gives more cause for concern, although the Pensions Protection Fund (PPF) now offers some relief if an employer goes bust, leaving a scheme in deficit.
If the employer refuses or is unable to pay higher contributions to deal with the deficit, the trustees have little choice other than to reduce the benefits of the scheme, increase employee contributions or close the scheme to future accrual. Every effort should be made to persuade the employer to meet their moral obligation to maintain the broad pensions promise they have made to staff.
Increasingly, unions are acting to defend pensions – sometimes through strike action, but more commonly by negotiating ways of saving the scheme, perhaps through agreeing some reduction in benefits or an increase in employee contributions. A good pension scheme is worth defending.