Thursday, 9 October 2008

More pressure on pension schemes

At the risk of stating the obvious, the turmoil in the financial markets is bound to kill off more of the remaining defined benefit pension schemes out there. Pension funds still stick at least half of the money they put into equities into the domestic market, which has taken a hammering, but it's not like other markets aren't under pressure too. This will inevitably increase scheme deficits and in turn require bigger contributions to try and get out of the hole.Here's what the NAPF says.

Some people will argue that this is exactly why companies shouldn't run DB schemes. They shouldn't be taking on that kind of unpredictable risk. But someone has to shoulder it. DB to DC doesn't get rid of investment risk - it just passes it onto the employee (along with longevity risk, risk in respect of fund selection etc).

And look what the FTSE100 has done in one year. For all those new members of DC schemes with money in UK equities (me included) the experience will have been one of watching your savings disappear. I wonder if there will be any kind of backlash.

1 comment:

Richard Young said...

Well, Tom, you don't look *that* old to me, so I imagine you can relax about your DC scheme. This whole crisis has been caused by endemic short-termism, but over the long term - which is, by definition, what a pension fund is - you'll be fine. Unless, of course, the lower risk investments your pension fund manager chooses for you as you near retirement (when a precipitous fall in equities *would* be a nightmare) turn out to be Icelandic deposit accounts.