Pensions: Downturn has wiped one fifth off retirement funds

Phillip Inman
The Guardian,
October 8 2008


Personal pension funds have crashed by almost a fifth over the last year, following steep falls in world stock markets, a report said yesterday.

In the last month alone, retirement savings have lost more than 10% of their value as investors sell their shares to avoid the worst effects of the credit crunch.

Financial adviser Hargreaves Lansdown said the dependence of most UK personal pensions on stock market investments meant further falls in share values would drag retirement funds even lower.

Critics of the government's handling of the crisis said ministers had ignored the plight of pension funds as they dithered over how to rescue the banking system.

Ros Altmann, an independent pensions analyst, said confidence was declining at an alarming rate as savers sought a safe haven for their money.

She said occupational schemes, most of them heavily invested in the stock market, would be badly affected.

More than a million people have stopped paying into their pensions in the last year following belt-tightening and what Altmann said was a loss offaith in the pension saving system.

Although the FTSE 100 index finished up 16 points last night, it is almost 25% down on last year. According to Hargreaves Lansdown, that resulted in a
18.6% decline in the average managed personal pension fund over the same period.

It said an index of personal pensions held in managed funds had declined by 11.43% since the first week of September.

Pensions have also been hit by a steep decline in property values. Commercial property fell sharply last year from all-time highs, and was quickly followed by residential property.

Managed funds account for the bulk of UK personal pension savings. Whilethey appear to give pension savers a spread of assets, most of them are more than 80% invested in shares.

Members of final-salary pensions offered mainly by a small group of blue chip companies and the public sector will be unaffected by the gyrations of the stockmarket. However, analysts warned that the increasing volatility of pension values would persuade companies to end their commitment.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "In the end, final salary schemes will be the big losers. Finance directors who mustmake up the difference with company funds when the stock market falls will hate the volatility they see at the moment and think hard about closing their schemes."

Recent research showed that most companies with final salary schemes are distracted by concerns for the survival of their businesses and are not looking to change their pension arrangements.

McPhail said while that might be the case in the short term, it was likely in the coming months they would turn their attention to switching to cheaper pension arrangements.

Altmann said the government needed to put in long-term safeguards to restore confidence in pensions. She said: "The government's response to the credit crunch is dreadful for pensions. This knee-jerk panic reaction shows no sign of understanding how we got into the mess, nor how to get out of it.

"It's far safer now to put your money into a bank, because there is suddenly a 100% guarantee, whereas the Financial Services Compensation Scheme only covers around 90% of an investment up to a capped amount. This can only serve to further undermine confidence at the very time when we will need pensions more."