It’s been an eventful week for pensions. The usually dull retirement savings vehicle has spent several days making the headlines due to a BBC investigation, government review and supermarket pension scheme closure.
On Monday evening, the BBC Panorama programme highlighted the charges associated with pension investments.
Whilst the show contained its usual level of sensationalist reporting, and failed to provide the necessary balance in my opinion, it did raise some important issues.
There is a big difference between the most and least expensive plans.
Some of the older pension schemes, set up before the introduction of Stakeholder pensions in 2001, are excessively expensive. Charges eat up investment returns, particularly in a low interest/inflation environment.
Investors would be well advised to think about not only the charges on their pension plans but also how they are invested. The BBC programme lacked balance because it tried to compare total charges over the life of a pension plan to the original investment amount, ignoring the value of investment growth.
Pensions hit the headlines again when an interim report from Lord Hutton highlighted various issues with public sector pensions.
It has long been argued that generous public sector pension benefits are compensation for lower salaries in a public sector career compared to the private sector. One of the most telling conclusions from Lord Hutton was dispelling this myth, and in fact the gap between public and private sector pay no longer justifies more generous public sector pensions.
The Unions predictably reacted in a defensive manner to any suggestion that future benefits should be less generous, or that public sector employees should contribute more to maintain their defined benefits.
Today we hear that Asda, the supermarket giant owned by Wall Mart, has decided to close its final salary pension scheme for 3,800 staff.
Employees at Asda will be offered membership of a less generous defined contribution pension scheme instead, where the investment risk is handed over to the individual scheme member, rather than met by the pension scheme as a whole.
This has long been the trend in the private sector, with the cost of keeping a defined benefits scheme open is proving to be too expensive. In the case of Asda, it has been reported that the scheme deficit rose from £210m to £400m in less than a year.
Back to the subject of pensions and charges, it was also reported today that NEST (the National Employment Savings Trust – a compulsory national pension scheme being introduced in 2012) could be ready for voluntary membership in as little as six months.
Whilst designed a low-cost workplace pension scheme, designed primarily for people who would not necessarily save for their retirement, there has been much criticism in the adviser community about the proposed charges.
We are expecting to see a 2% initial charge levied on each contribution to NEST, to help cover the original set-up and running costs of the NEST Corporation. There is no defined end date for this initial charge, which makes it difficult to understand how the NEST Corporation will produce meaningful illustrations for new members!
As the challenges associated with an ageing population continue to grow, the can only expect to see pensions remaining in the headlines.
Photo courtesy of Dominic’s pics.
