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Pension shock for millions as crisis looms

Warning of shrinking retirement payouts

Guardian Unlimited Money

Rupert Jones and Patrick Collinson Thursday August 16, 2001 The Guardian

Millions of workers were warned yesterday that they may have to rethink their dreams of comfortable retirement after figures showed that they could be in line for company pension payouts that are much smaller than expected. In some cases, members of money purchase pension schemes - to which several million people belong - could end up with retirement incomes less than half the size they were anticipating.

The figures from employee benefits consultancy William M Mercer reveal the extent of the damage low interest rates, falling stock markets and increased life expectancy are wreaking on this type of pension. They show that a 30-year-old man, who joined a money purchase scheme in 1991 and put in a total of 10% of his salary, could have expected a pension equivalent to 55% of his final pay at age 65.

A 30-year-old joining this year could expect to retire at 65 with a pension of just 24% of final pay, said the survey.

Falling investment returns, low inflation and low interest rates are the same factors that have plunged the endowment policies held by millions of homeowners into crisis, and contributed to Equitable Life's spectacular difficulties.

William M Mercer said many pension scheme members will need to think seriously about paying substantially more into their pension if they want to achieve a decent income in retirement. The total amount that ideally needs to be going into people's pension pots is 15% to 20% of their pay, but the typical contribution is only 9.75%.

The findings come 24 hours after another survey from actuaries Bacon & Woodrow revealed that 17 of Britain's 100 biggest companies have pension schemes that are underfunded by millions of pounds.

The looming pensions crisis comes amid evidence that the government's stakeholder scheme - designed to provide a top-up retirement income for the low-paid - has failed to take off. Figures earlier this week revealed that only 50,000 new savers have opened up stakeholder pensions since they were introduced four months ago, far below initial expectations. In total, 224,000 policies have been taken out, but most were transfers from existing policies.

Jonathan Gainsford, a partner at William M Mercer, points out that members of final salary company pension schemes are much better protected from the ravages of today's economic climate because with these, staff are guaranteed a certain level of pension benefits at retirement. But growing numbers of employers including BT and Barclays are abandoning their final salary schemes and moving over to money purchase arrangements for new employees.

The Institute of Directors blamed Chancellor Gordon Brown for raiding company pension schemes with a 5bn tax in the first Budget after the 1997 election.

Head of policy Ruth Lea said: "The shift to money purchase schemes has taken place because final salary schemes have become terrifically expensive for companies to run. When the Chancellor removed tax credits in 1997 we warned that it would have a big long-term effect, but our voice went unheeded."

She added that companies will not be able to afford to make up pension shortfalls, and rejected calls for compulsory funding levels for pension schemes. "Employees will struggle, but so will most businesses, which do not have the spare money to pour into pension schemes."

In Whitehall concern is now growing about a severe loss of public confidence in the pensions system, brought on by the Equitable Life crisis and made worse by falling stock markets and lower projections of pension payouts.§ion=103676&rand=0236229

-- Martin Thompson (, August 16, 2001

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