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Pensions: 'Don't panic...'

Joanne Segars
Joanne Segars
National Association of Pension Funds

A pension is there to provide happiness in retirement...

Against the background of the extreme conditions that we have seen this week, in one area it is important to keep a keen a sense of perspective and proportion - workplace pensions.

Looking at the UK as a whole, we have one of the best protected systems in the EU, with the Pension Protection Fund, the Pensions Regulator and the Financial Services Authority.

In addition, confidence amongst employees of pensions as the best way to save for retirement has also been improving throughout 2008.

Twice a year, the NAPF measures the Pensions Confidence Rating amongst workers and earlier in 2008 the rating was a mere +3%, but by mid-September it was +22%.

Partly, this is due to people "psychologically ring-fencing" their pension despite the pressures on household incomes.

They are going back to the traditional "at least I have got my pension".

In addition, falling house prices have meant that a number of people are thinking again about relying on property to save for their retirement.

There are two types of private sector workplace pensions in the UK.

One] Defined benefit pensions which are salary-related (often referred to as 'final-salary' pensions) and Two] Defined contribution pensions which are based on the performance of the money invested by the employer and employee.

The latter includes group personal pensions and group stakeholder pensions. It is important to look at the effect for those with retirement savings in these different types of schemes.

Defined Benefit

Pensioners demonstrating
Many go to great lengths to protect their pensions...

Pension funds are long-term investors and members of these pension schemes will not be directly affected by the recent stock market falls as, in the first instance, the employer will be expected to make up any shortfall.

In addition, UK pension funds have been reducing the amount of money they hold in the UK stock markets and also stock markets around the world.

For example, in 2006, UK pension funds had 28% invested in the UK stock market, this year that figure had reduced to 21%.

It means they are not better cushioned from the effects of the stock market than previously.

It would be naive though to think that this week and the market volatility of the past year will have no effect.

For those already in these schemes, as stated, it is the responsibility of the employer to deliver the pension promised to people.

However, over the longer term, a prolonged adverse economic climate may make some employers review their commitment to keeping this form of pension scheme open to new employees.

Currently, 28% of these schemes, covering 1.3 million people, are still open to new members.

Defined Contribution schemes

There are approximately five million members of these schemes, and for people who are more than five or 10 years from retirement, past experience suggests that asset values will recover in advance of their retirement date.

Joanne Segars
Our message is 'don't panic'
Joanne Segars
It is true, however, that those within a few years of retirement age, might potentially see a fall in their pension fund value and that this could result in a lower pension.

However, fortunately, around 75% of members are in lifestyle funds which means that if they are close to retirement, their fund will already have been switched to less volatile assets such as bonds or cash. They are, therefore, cushioned from the impact of recent falls.


In conclusion, it is important that both commentators and employees maintain a sense of perspective amongst the turmoil currently taking place.

A minority of people with a workplace pension could be affected but only really if they are approaching retirement with a defined contribution pension that is not in a lifestyle fund. For others, the effects should be relatively neutral.

Our message is 'don't panic'.

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