FTSE fall sparks pension scheme concern

2 July 2008

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.”

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