This question came up over the weekend , as I was discussing with one of my colleagues whether a pension paid for life from a defined benefit pension was guaranteed.

I am not arguing here as a lawyer, but as someone who has been under the impression that my former employer is under an obligation to pay my pension and so long as my employer is around, my pension is guaranteed to the paid by the employer and from the fund that sits behind the promise.

It would seem that pensions are not guaranteed in this way and that I am wrong to think that the money that I anticipated coming my way for as long as I was around was “guaranteed”, at least within the definitions of scheme rules.

Is an annuity guaranteed

A Government website says it is

What about a Guaranteed Minimum Pension then?

So a workplace pension can be guaranteed?

Well yes, so long as it is being paid in place of state benefits you would otherwise have been guaranteed.

So are state benefits guaranteed?

State benefits are guaranteed to be paid for so long as the state wants to pay them. The original SERPS promise, that GMPs were able to replace, was itself changed several times before SERPS was swallowed into the State Pension.

State benefits are only as good as the next statement from the Chancellor on the future of the triple lock , the basis of accrual and of course the age when it starts getting paid. A state pension may be guaranteed to be paid but it is certainly not a guaranteed future benefit.

So why don’t we talk about our company pensions being guaranteed?

If the state bit of our company pension can be called “guaranteed”, why not the rest of it? It’s been said that BA is a pension scheme which flies planes as a side-line, BT  we could argue is bigger as a pension fund than as a company.

We don’t talk about company pensions as guaranteed till they have been bought out by an insurance company when everyone says “breathe”.

It’s all down to the covenant stupid.

All down to the covenant?

Sponsoring employers of company pension schemes that pay pensions rather than pots, can and do go bust. When that happens, they “fall into” the Pension Protection Fund and “no” the PPF isn’t guaranteed to pay your pension either, because it has the right to reduce your pension if it hasn’t got the means to do so.

So the only reason that pensions paid from a company pension scheme or the PPF aren’t guaranteed is because if the employer or the PPF failed , you wouldn’t be paid the full amount of the pension.

While insurance companies don’t fail, unless they are the Equitable Life or an insurance company overseas not governed by our strict rules.

Hang on – I thought we were dealing in absolutes here

If you are going to bandy around the word “guarantee” , you are dealing in a measure of absolute certainty that doesn’t apply to state pensions, or to company pensions, or to the PPF – unless the pension  is the “Guaranteed Minimum Pension”.

The GMP and the annuity are absolutely guaranteed unless they are paid by the Equitable Life in which case they aren’t.

But what’s this? Reading the Financial Services’ Compensation Scheme’s website I learn

Pension provider failures

Generally, FSCS can protect pensions that are provided by UK-regulated insurers, as long as they qualify as ‘contracts of long-term insurance’. A common example is an annuity, where you exchange the cash in your pension for a regular income from an insurance company.

Why does an annuity need FSCS protection, I thought that unlike a pension , it was guaranteed? It would seem not. FSCS protects annuities that fail , like the PPF protects pensions that fail. Looking into the level of protection, I am not sure I wouldn’t prefer the PPF but that’s another matter.

Nothing guaranteed but death

What is common between pensions and annuities is that they pay an income till you die, or are supposed to, unless they fail, in which they are paid by FSCS or the PPF till they fail and then you will get whatever the Government agrees you will get – which is what happens with state pensions.

Is there an insurer of last resort – from this analysis, the answer is yes. Ultimately we all get bailed out by each other unless we decide to welch on that kind of social insurance in which case you really are on your own.

Don’t be silly

I think we have to stop being silly about the word guarantee

Company pensions are guaranteed by companies till they fail

State pensions are guaranteed by the state until the state changes its mind

Annuities are guaranteed by insurers until they go bust

Even CDC pensions are only guaranteed to be paid with the best endeavours of those who manage them.

If annuities go bust your pension is guaranteed by FSCS on FSCS terms and if Company Pensions go bust they are guaranteed by the PPF till the PPF fund and levies run out

Collective DC pensions which don’t carry guarantees rely on others in the scheme while personal pensions carry no implicit guarantee other than the fund will be available to spend.

Don’t be silly -everything and nothing is guaranteed.

A sense of perspective

Most arguments about guarantees come down to perspective. If you are offering the guarantee, you’d like it to be considered a guaranteed by everyone but the courts who will side with you as you slink off into the buses like a slithery snake.

If you are a customer, you want to catch that snake by the tail and make sure it pays in full and if it doesn’t, that someone else bails you out.

And if you are in charge of the legal system, you are constantly playing whack a mole with the word guarantee, just hoping that it never applies because nothing goes wrong.

Well shit happens, the Equitable Life went bust, so did al the employers of the schemes in the PPF and no doubt we haven’t heard the end of debates on whether Government can change the state pension promise so the tax-payer doesn’t go bust.

In all of this, we need a common language about reasonable certainty which allows us to think of what we have as ours and that the right to our future pension payments is pretty well guaranteed whether they come from an insurer or the state or from a company pension.

“Humankind cannot bear very much reality.”

Said Thomas Stearns Eliot. We need certainty even where none exists and we call things guaranteed when what we should say is  “so long as”.

We aren’t all lawyers and life is not black and white, we live with diversity of certainty and use “guarantee” to provide us with comfort, even if in reality only death is guaranteed.

Life is too short as it is , let’s not waste what’s left of it worried about imponderables. Pensions are guaranteed and it’s up to us to work out whether the guarantee’s worthwhile.