Don't panic over deficits

Pension scheme assets and liabilities are valued on the basis of whether they could meet all their members' needs immediately. But this is not a realistic assessment as not all the members will retire at the same time while new ones may be coming in. The deficit in a pension scheme can move around on almost a daily basis depending on the movements of the shares, bonds and assets it holds.

Jason Butler, partner at independent financial adviser Bloomsbury Financial Planning, likens it to an individual being assessed on whether they could pay back their entire mortgage immediately rather than over the given term.

"The recent turmoil in the global stock markets has highlighted, more than ever, the inadequacy of mark-to-market accounting to evaluate the long-term liabilities of pensions," Lindsay Tomlinson, chairman of National Association of Pension Funds commented recently. "They allow short-term stock market volatility to perversely affect pensions and their long-term strategy by presenting large deficits which may prove inaccurate in the long run."

Read the full NAPF report.

Even if the scheme couldn't meet its members' needs at a given point, providing the employer is financially strong and able to meet the shortfall it is not a problem. "A final-salary pension scheme deficit should only be a source of real concern to members if they think the employer is going to go bust," says Laith Khalaf, pensions analyst at Hargreaves Lansdown.

Even if your employer's future is uncertain it may still be worth you staying in the scheme. Most final- salary schemes are covered by the Pension Protection Fund (PPF), a government sponsored scheme that steps in and covers up to 90 per cent of the members' pension benefits in most cases. It has an overall annual cap of £29,897.42 annual income at age 65 after the 90 per cent has been applied, and is adjusted according to the age at which compensation comes into payment, so is lower for younger people.

If you have reached the scheme's retirement age, are in receipt of an ill health pension or a survivor's pension is in payment, then the protected amount will be 100 per cent of the pension.

Once compensation is in payment the part that derives from pensionable service will be increased each year in line with Retail Prices Index (RPI) inflation, capped at 2.5 per cent for compensation derived after 6 April 1997 or zero for pensions earned before then. This could result in a lower rate of increase than the scheme would have provided.

But even with these provisos advisers argue that the PPF gives pretty good coverage and that you should stick with your final-salary scheme unless there is a compelling reason to leave. It is rare to find a better defined contribution scheme, even when your final-salary scheme income has been reduced, and you do not incur market or full inflation risk.

If you transfer out, even if your employer offers an enhanced transfer value or an additional upfront payment in cash, you may still not be as well off. "Some employers try bribing you with an enhanced transfer but you are often better placed staying in the scheme," says Alistair Cunningham, director of chartered financial planner Wingate Financial.

Considering a transfer out is something you should not undertake without professional advice as it is a complex area. To get the best deal, in this case it is also preferable to go to a fee-paying adviser who will honestly tell you whether you should come out or not, after conducting a transfer value analysis to see what return your new pension would have to make to match your final-salary scheme. Someone on a commission basis would benefit from getting you to transfer even if this is not your best course of action.

However, independent advice on this complex area will cost you at least £2,000 and maybe as much as £4,000.