Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Your Company Pension is in Danger!

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

By: MoneyWeek

Personal_Finance

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 http://www.MarketOracle.co.uk - 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