Archive for May, 2009

2009 will see a number of large organisations making a fundamental change to their company pensions – cancelling final salary schemes for existing members.

If you are one of the lucky few still in a final-salary, defined benefit (DB), plan, you need to know what this will mean for you and your plans for retirement.

Closing a scheme to current members is a big step for employers.

Many smaller companies have already done this.

So far, larger ones have typically made modifications to their DB scheme, and probably stopped people joining it some years ago.

But cancelling the ability of existing members to accrue more pension, by stopping them paying in any more money, is new for most large organisations.

Looming on the horizon

Two big employers, the Royal Mail and BT, have changed their final-salary schemes for existing staff to a half-way house, known as a career average scheme.

And three years ago the pest control business Rentokil became the most high-profile employer to move all its staff into the standard alternative known as a defined contribution (DC) scheme, which pays money which individuals have to invest in order get a pension.

But once more major companies do this, others may follow relatively quickly.

The main reason they may choose this path is that they see promising a pension for life as too risky and very expensive.

The financial crisis has squeezed company finances, as well as making pensions deficits worse.

Towers Perrin found in March that pension fund liabilities account for nearly 35% of FTSE 100 companies’ value on the stock market.

Companies want to focus on fixing their current deficit problems, stop the build-up of any further DB pension entitlements or deficits, and get all employees on to the same type of pension plan.

Also, cutting back on pensions may save jobs.

Consultation

If your employer announces this sort of change, it is very likely that you will be offered a DC scheme for the future instead.

You will still have the DB pension you have built up, but no more pension will be added.

A DC pension fund is like a long-term savings account where what you get out will depend on how much you and the employer pay in, and how well the investments perform.

There is no guarantee related to how long you have been employed or the level of your final salary.

The first thing you will hear is an announcement that a consultation will be held, where the company will ask your views.

This is your opportunity to raise your voice.

You may well find that there is a group of people nominated to collect your opinions and who will seek to influence the company and get the best deal they can.

And if there is a trade union it will certainly be involved.

Is there anything you can do?

If the company has a good case for making the change then there are unlikely to be major modifications – but do not assume you can ignore the consultation.

Changes will have their biggest effect on young employees
The best approach is to work out how the change will affect you and what decisions you will have to make.

Moving into a DC world means that you are going to have to change your mindset.

In your old DB scheme you did not need to pay much attention to it, but in a DC plan you will have choices about how your money is invested, and how much you save.

If you do not get involved with your DC pension, you will end up in the default investment fund which could be either too risky or too safe for your circumstances.

Understand the offer

The first step then is to read and digest all the available information.

Go to the presentations, read the materials, use any interactive models and ask questions.

Look out in the consultation literature for any tips about how you can tell what level of risk is right for you.

Also, make sure you do not miss out on top-up company contributions.

Often, if you pay in extra to your pension the company will pay extra too.

Think about your wider saving plans, any other pension plans you have and whether you are relying on non-pension savings, even your house, to help fund your retirement.

In some instances, you may be able to choose between accepting the move to DC or staying within the DB scheme but having to pay more into it.

It may even mean that you get lower salary growth.

If this is the case, make sure you understand both options and what they would mean for you.

Advice

Where employees have to make choices like these, some companies will provide access to personalised modellers or advice.

It is almost certain you will have to save more yourself

Whatever change is proposed, it is almost certain you will have to save more yourself if you want to have the same expected retirement income.

It does not mean you have to save more.

You might conclude that overall you are still on target to have enough income in retirement or that you will have to put back your planned retirement date.

But it will be up to you to work this out for yourself using the information provided by your employer, or to seek independent advice.

And finally, once you have a DC pension, set aside some time on regular basis to check that it is still on track to deliver what you need.

Eight out of 10 companies do not plan to change their pension scheme when the Government’s new personal accounts are launched, research has shown.

Around 80% of employers said they would keep their existing pension arrangements in place when the low-cost accounts are introduced in 2012, with just 2% of firms saying they would offer only the new accounts to their staff, according to Punter Southall Financial Management.

The research goes some way towards allaying fears that companies will down-grade their pensions to the minimum level required by the new legislation.

Personal accounts are being launched to coincide with new rules that come into force in 2012, under which workers will automatically be enrolled into a workplace pension scheme, although they will retain the right to opt out.

Individuals will have to have at least 8% of their annual salary paid into a pension, typically made up of employer contributions of 3%, with workers paying in 4% and the Government adding 1%.

The survey, which was based on responses from 300 companies, also found that only 5% of firms now have a final salary pension scheme which is still open to new members, with other companies offering defined contribution schemes, in which employees shoulder all the risk, instead.

Just under half of pension schemes have been reviewed during the past 12 months, but 14% had not been reviewed for at least five years.

The research also found that the majority of workers are opting for the default investment fund offered by defined contribution schemes, rather than picking one for themselves.

Six out of 10 companies said they thought they had a responsibility towards financially educating their staff, but 57% admitted they did not promote their pension to workers who had not joined it.

The Personal Accounts Delivery Authority, overseeing the introduction of the accounts, said: “Our target market is people on low to middle incomes, many of whom currently do not have access to a workplace pension. We don’t expect huge numbers of companies with existing provision to use us across their workforce – we are designed to complement existing provision.”

SIPPs offer the same great tax advantages as other personal pensions but provide greater investment flexibility, allowing you to choose where you invest your pension. Therefore the SIPP allows you to take control of your pension and manage it at a level that suits you.

Some Sipps have large annual fees making them only suitable for the extremely well off, however the Vantage Sipp from Hargreaves Lansdown has no set-up fee and low annual fees (in many cases no annual fee) meaning more of your money gets invested.

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Northern Rock has revealed the enhanced competitiveness of its product range has seen mortgage applications jump by 70% in March, with the average LTV of new lending just 48%.

The nationalised bank has published its trading statement for the first quarter, confirming gross mortgage lending for the first quarter was just £550m, with this representing mortgage completions in the period and not yet reflecting the impact of the planned increases in mortgage lending.
Mortgage redemption rates have slowed significantly, and are running at around half the average rate of 2008.

The bank said its debt management strategies are beginning to pay off, with its stock of unsold repossessed properties falling from 3620 in December 2008 to 3200 at the end of March.

However, residential arrears over three months have increased to 3.67% from 2.92% in December. Northern Rock said it had noted tentative signs of improvement in early arrears trends, reflecting the investment in its debt management capability and improved affordability levels as a result of falling interest rates.

“We are implementing our new business plan, which will enable us to move forward with our lending programme,” says Gary Hoffman, chief executive at Northern Rock.

He continues: “The revised State aid application has been submitted and we are making good progress with the legal and capital restructuring of the business – which we expect to complete in the second half of the year.

“The economic environment remains difficult but our trading performance in the quarter was in line with our expectations and we saw some early signs of mortgage applications increasing in March, reflecting pricing adjustments to our current product range.”

Net lending to individuals increased by just £0.9bn in March, lower than both February’s increase and the six-month average, according to Bank of England figures.

This was also the case with the increase in net lending secured on dwellings (£0.8bn), which also fell below the jumps of the preceding month and the six-month average.

The 12-month growth rate fell further, by 0.4% to 2%, while the three-month annualised growth rate fell by 0.4% to 1.0%.

However, the number of loans approved for house purchase (39,230) was higher than in February and higher than the previous six-month average, while approvals for remortgaging (31,746) were higher than in February, but below the previous six-month average.