The current credit crunch is damaging, no, savaging, private sector pensions and their annuity buying power. Recently two of Britain’s leading companies announced they are making big cutbacks to their company pension schemes and this highlighted once again the problems facing many millions of private-sector workers when they come to retire.
The mighty BP will close its final salary pension arrangement to new entrants from April next year while Barclays Bank is taking about 18,000 staff out of its final-salary arrangement and into an inferior defined contribution (DC) scheme (like a personal pension plan), albeit with some protection against hefty swings in the stockmarket. Barclays actually pays £350 million a year into its pension fund. Although both arrangements will be superior to the bulk standard company DC scheme, these events suggest final-salary schemes could soon disappear altogether in the private sector.
Britain’s largest FTSE 100 companies, facing total pension fund deficits of around £30 billion, have little option if they are to survive through the recession. Morrisons, the supermarket, recently switched 4,500 workers from a final-salary pension arrangement into one based on average salary while BT’s share price continues to suffer somewhat from fears about its huge pension fund deficit.
Nearly 750,000 UK workers are expected to retire in 2009 and, with the value of pensions fund assets held around the world slashed by over £3 billion since 2007, many will have significant trouble making ends meet. A survey of people aged 60-plus by Intune, the financial services arm of Age Concern and Help The Aged, found that 55% of private pension-holders were very disappointed with the pension annuity income they expect to receive when they stop work. If they could do it all over again, some 39% would have started a pension plan earlier or paid more into it. Many would have switched their pension contributions into a savings account or an ISA investment instead, or paid their mortgage off that much faster.
According to Mervyn Kohler, special adviser to both Age Concern and Help The Aged, around 680,000 people are hitting retirement age through this year, and more may be looking at buying an annuity earlier than planned because they have been made redundant. There is clearly a worrying level of market failure which should be tackled so retirees understand what annuities are and what their options are.
The credit crunch is really hitting private sector pensions, and anyone with a £50,000 pension fund retiring in 2009 will be 27% worse off – around £20 per week – than someone who quit in 2008, according to current annuity rates. The old fashioned idea that stockmarkets can always be relied upon to deliver strong returns has left millions of people facing an impoverished old age. It is therefore really important that people understand what risks and costs have passed from their employers on to their own shoulders.
Many people have the opinion that many firms are likely to follow Barclays and BP over the next couple of years, although the new BP arrangement, with total contributions at 15% of salary, will still be pretty good. As they see the stockmarkets recover, more firms will close off final salary schemes to ensure they do not hit yet another downturn with that heavy millstone around their necks. That millstone actually shifts to the employee who now has to make sure that his pension pot is sufficient enough to enable him, when looking for annuity quotes, to get the best annuity rates, and the best retirement income.
