FTSE fall sparks pension scheme concern
Share prices across the global market suffered a day of huge losses yesterday, with £30 billion wiped off the value of FTSE 100 companies.
The FTSE index of Britain’s 100 largest companies closed 146 points down on Tuesday evening, to 5.479 points.
The falls have sparked concerns for people invested in pension schemes, with these now suffering a deficit of £30 billion. Research from Aon Consulting found that over the past few weeks, the majority of schemes in surplus fell from just over half to 25%.
The Aon200 Index, which tracks the surplus (or deficit) of the 200 largest UK privately-sponsored pension final salary schemes, reveals that the aggregate pension scheme deficit deteriorated by £36 billion in June and now stands at £30 billion.
Additional research by Watson Wyatt shows that pension funds fell from a surplus of £23 billion to a deficit of £8 billion between May and June this year.
Should pension investors be worried?
Deficits shouldn’t cause too much concern for investors in defined contribution schemes, although their employers might now have to consider increasing their funding or even putting an end to new members.
Laith Khalaf, a pensions analyst at Hargreaves Lansdown, says members of schemes have no responsibility to “make good” their pension funds as they are covered by the Pension Protection Fund (PPF).
The PPF will pay 90% compensation to people below their scheme’s normal pension age up to £27,700.72.
Marcus Hurd, senior consultant and actuary at Aon Consulting, agrees that scheme members should be alarmed by the volatility, adding that UK pension scheme sponsors should be able to absorb the losses.
But he warns that the security of pension benefits is critically related to the strength of the employer providing those benefits: “Pension schemes have two sources of security – the cash within the scheme and the employer behind the scheme.
“Some pension scheme trustees are tempted to pay only lip service to the employer covenant and the agonising truth will emerge over time.”
If you are in a defined contribution scheme invested in equities and are coming up to retirement age, then the stockmarket falls may cause greater concern. Khalaf says people in this situation should consider moving away from equities and into cash and bonds, where volatility and risk are much lower.
He adds: “Although some people may see the value of their pensions fluctuate, offsetting the falls in equities are strong annuity rates and high yields on bonds. It’s a swings and roundabouts scenario.”
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.