Complicated one, this, but people in Pearl’s zombie with-profits funds are being offered a chance. Thousands of savers stuck in Phoenix & London Assurance’s have been thrown a lifeline which could dramatically boost their chances of building a decent pension fund and hence a better pension annuity at retirement. Basically, they are being told: We’ll double your money if you sign away guaranteed pensions.
Pearl, which now runs the £6bn funds, is outlining plans to 50,000 savers designed to boost their retirement income. Those effected in the main took out pensions with the firm – previously Sun Alliance and London Assurance – between 1980 and 1994.
Basically, the pension savers would have to give up expensive benefits called ‘guaranteed annuity rates’, and, in return, they would receive a one-off increase to their fund and would have the opportunity for better long-term growth for that larger fund. In some cases this increase could be one-third.
Guaranteed annuity rates promise savers a specific level of retirement income on the money they have saved in their pension. They are not common these days and were at the centre of the dramatic problems at Equitable Life some years ago. These guarantees are hugely valuable – and hugely expensive for the pension firm.
To meet these guarantees the underlying fund has to adopt a very conservative approach to investment. Bonds have been used a great deal and this has stunted the growth of thousands of savers’ pensions. Annual bonuses have all but dried up. On top of all this Pearl has also had to set aside a vast amount of money to ensure it can provide pensions at guaranteed rates.
Get rid of the guarantees and money will be paid back to savers, almost doubling some pension pots, Pearl states. Pearl says it can then change investment strategy and this could boost the investment returns on pensions by a third, using conservative forecasts of investment growth.
An example: a man who took out a pension with Phoenix in 1992 and is set to retire in 2023. If the changes go through, his £10,191 fund would about double to £20,299. If the stockmarket then rises at around 7% annually, the fund would grow to £57,000 instead of £29,030. This would buy an annual pension annuity of £2,460 – almost a third higher than the £1,910 pension annuity the same saver would get if things stay as they are.
