Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Why Your Company Pension is in Danger!

Personal_Finance / Pensions & Retirement Apr 20, 2009 - 10:49 AM GMT

By: MoneyWeek


Best Financial Markets Analysis ArticleCompany pensions are in big trouble.
UK company pension funds are now in the red to the tune of over £240bn - the biggest shortfall ever recorded. And here's the irony. It's partly due to QE – quantitative easing, the Bank of England's cash printing press, which is supposed to be bailing Britain out.

And there are even bigger pension problems looming. With the economy going downhill fast, more firms will go bust and the company fund deficit will just keep climbing.

OK, there's a back-up plan - the Pension Protection Fund (PPF). But will the PPF cope with the growing demands on it? And should you now transfer out of your company's final salary scheme?

QE hasn't helped pension funds at all, despite being the Bank of England's £150bn money-minting method for boosting the economy.

Here's why not. When the Bank began adding liquidity to the system by buying UK government bonds - gilts - it forced up prices, which in turn slashed yields to the lowest levels ever recorded. But rather than support big gilt-holding pension funds, it's done the opposite. Those funds now get less from their fixed-income assets than before, which means they'll need more money to meet their future liabilities.

More pension problems are looming

Mind you, QE isn't the only pension fund problem. Big share price falls have been adding to the shortfall by knocking large chunks out of the assets of company pension schemes. And while some share prices may recover, Deloitte's consultants warn that rising deficits could already require many employers to pony up higher pension contributions, which some cash-strapped companies may not be able to afford. No wonder 80% of schemes have closed their doors to new members.

But there's an even bigger problem looming. With the economy on a slippery downhill slope, more and more businesses will bite the dust. As Mehernosh Engineer at BNP Paribas puts it: "We expect a combination of further weakening in the economy leading to sharp profit declines, large and looming refinancing risk, and a further decrease in risk and bank lending appetite to lead to higher stress and defaults". We've also discussed the dangers that many industries face in last Thursday's Money Morning: Dividend payments are diving: what can you do?

In other words, the business damage-to-date will look like a minor hiccough compared with what's in store. And this will further widen the total company pension fund deficit as 'underfunding' increases, i.e. the kitty will prove well short of what's needed to pay all the claims.

The Pension Protection Fund may not protect you

There is, of course, a backstop - the PPF, which is backed by levies on member pension funds. If companies go bust when their schemes are underfunded, the PPF pays out 90% of the pension you would have received, up to £28,000 a year.

But the PPF already has its hands more than full. Its losses have been stacking up, and there's a growing risk this pension lifeboat could itself be swamped, says the Guardian's Simon Bowers and Philip Inman. The government's under pressure to guarantee it, though with the public purse being stretched every which way but loose, there's not enough spare cash. "Rhetoric about guarantees has conspicuously disappeared", says Watson Wyatt's David Robbins, "with more ministerial speeches saying only that the PPF 'provides a safety net'."

In short, the PPF could be an accident waiting to happen. And rising worries about so many funds mean that it may be time to think the unthinkable. Such as transferring out of your company final salary scheme into a personal pension, known as a DC – defined contribution – plan, where you'd have much more control over your own money.

This could be a good time to go it alone

One reason this could be a good time to 'go it alone' is that some firms are now offering their employees sweeteners to ditch their company pensions, says the Sunday Times' Jennifer Hill.

And here's the rub. By forcing gilt yields down so low, QE is now opening up an unprecedented window of opportunity. Because for exactly the same reason that it's made life harder for your employer's scheme, i.e. with more money being needed to pay for your eventual pension, QE has pushed up the transfer values you'd now receive. These soared by as much as a staggering 31% in March alone, says Hill, quoting First Actuarial data.

Clearly, while transferring depends on the solvency of your employers' scheme, there are risks. The decision is final, i.e. you can't reverse it. You'd want a new personal pension to match up to what you should get by staying put. It also depends on individual circumstances, so you should consult a financial adviser before taking the plunge. And check out the useful Pensions Advisory Service site - an independent adviser backed by the Department for Work & Pensions.

With many company schemes, and the PPF, looking ever dodgier, it could be well worth considering...

By David Stevenson for Money Morning, the free daily investment email from MoneyWeek magazine.

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules