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Friday, 4 May, 2001, 07:10 GMT 08:10 UK
Will you have enough to retire on?
By BBC News Online's Emma Clark

When anyone starts to talk about pensions, most people just glaze over.

This habitual lack of interest probably explains why most workers are unaware that their company pension scheme could short-change them during retirement.

The Church of England has just warned that its employees may not have enough to live on in retirement.

The problem is not unique to members of the clergy and the pension industry's major players are wracking their brains to find a solution.

Gillian Cook, an associate at one of the industry's top consultancies, Bacon & Woodrow, says there is a "very big risk" that many people of today's generation won't have enough to retire on.

Ironically, the problem affects a new generation of employees who have deliberately joined company pension schemes to supplement a paltry state allowance.

Does anyone have 12m?

This week the Church of England announced that it would need to find another 12m each year to plug up its pension fund.

Vicar baptising a baby
The Church is concerned the clergy won't have enough money in retirement

The Church is concerned that under its current arrangements the clergy won't have enough money for a decent retirement.

But the reality is that most employers nowadays would not step in to help.

This is because today's workers usually sign onto company pension programmes called "defined contribution" schemes.

Defined contribution schemes, which came over from the US, allow employers to define at the outset how much they contribute to the employee's pot of pension money.

Such schemes mean employers no longer have to commit to paying a certain amount when employees retire.

Therefore, the actual pension received in retirement merely depends on how well the scheme's investments have performed on the stock market.

This means that the employee bears the risk of whether he or she will have enough retirement money at the end of the day.

In the old days...

The reason few people have come across this problem before is because it would not have affected their parents or their grandparents.

Back in the old days, companies provided pension schemes that paid retired employees a percentage of their working income.

Pensioners
Parents and grandparents didn't have the same problem
In other words, companies were obliged to pay a certain pension, regardless of how the stock market performed.

These type of schemes - called "final salary" or "defined benefit" schemes still exist, but many are now closed to new employees.

The Church of England is rare because it decided two years ago to opt for a final salary scheme, rather than defined contribution, to provide benefits for the clergy.

It is this decision that has left it with an annual bill of 12m.

Fulfilling promises

Roger Radford, secretary of the pensions board at the Church of England, admits the problem of finding the money would be "less urgent" if the scheme was in fact defined contribution.


With a defined contribution scheme, one doesn't need to find money to fulfil certain promises

Roger Radford
Church of England
"With a defined contribution scheme, one doesn't need to find money to fulfil certain promises," he says.

But the Church opted for a final salary scheme because it feels a responsibility to provide a specific pension package, he adds.

"Further along the line we may look at defined contribution schemes... a lot of people are saying this is where we ought to go."

The Church's decision in 1998 to go the final salary route is unusual because it was taken in the midst of mini-pension revolution.

The switch

In the late 1990s, many companies were advised to switch to defined contribution schemes to reduce the expense - and risk - of paying set-amount pensions.

The expense and risk for employers have increased as people began to live longer.

Gillian Cook, Bacon & Woodrow
Gillian Cook: "I don't think people appreciate what they have to pay in to get a decent pension"
Currently about 850bn in the UK is invested in pension plans. At the moment, defined contribution schemes make up only a tiny proportion of that.

But the trend toward defined contribution schemes is growing very rapidly, says Bacon & Woodrow's Ms Cook.

She is very concerned that with the new type of scheme many employees will discover a "massive shortfall" between the pension they expect and the money they receive in retirement.

"I don't think people appreciate what they have to pay in to get a decent pension," she adds.

The recommended level to pay in is 10-15% of the monthly pay package, but most people pay 8-9%.

Crunch time

The industry has only recently become aware of the problem with the current downturn in the stock markets.

Most defined contribution schemes were set up when the markets were doing consistently well, masking the potential problems ahead.

Ms Cook says the crunch time will come in 10 or 20 years time when today's employees start to reach pensionable age and find that their pension is inadequate.

The worst will come for employees that need to retire during a stock market downturn - such as there is now.

At retirement, members of a defined contribution scheme cash in their pension investments and use the money to buy an annuity - which is in effect a regular income.

Pension providers are able to offer annuities by reinvesting the pension money in bond instruments, which do not make as much money as stocks, but are a lot safer.

However, when shares are down, bonds become more expensive, thereby pushing up the cost of an annuity.

This leaves employees having to buy expensive annuities with pension money that has already taken hit from poor returns in the stock market.

"You certainly don't want (market) volatility one year or six months before you retire," says Robert Guy at Marketplace, the IFA arm of Bradford & Bingley.

Education

There are ways of avoiding this if you can plan exactly when you want to retire. For example, pension money can be gradually shifted into bonds out of volatile equities several years before retirement.

"If you have that degree of flexibility, you don't need to worry," adds Mr Guy.

But if an employee is sick or made redundant during a market downturn, he or she could lose a substantial amount of money.


If they get to that age, and the planning is done, there is not a lot that can be done

Robert Guy
Bradford & Bingley

"If they get to that age, and the planning is done, there is not a lot that can be done," says Mr Guy.

Bacon & Woodrow's Ms Cook believes that "there needs to be a massive education programme" to enlighten people about the risks of the new pension schemes.

"It's a real issue for lots of people today," she says.

Mr Guy agrees. "There is a misconception in people's mind about how much they need to put away."

Without knowledge and financial discipline, many employees could be heading for a miserable retirement.

The Church of England is hoping its parishioners will help foot its annual pension bill of 12m.

In 20 year's time, the impoverished parishioners could looking for a bit of financial support in return.

See also:

10 Apr 01 | Business
Pensioners caught out by hard sell
06 Apr 01 | Business
New pensions go on sale
30 Mar 01 | Business
Could it happen again?
29 Mar 01 | Business
The pensioners' tale
22 Mar 01 | Business
Glad to be grey?
08 Mar 01 | Business
Pension experts criticise budget
08 Feb 01 | Business
Part-timers win pension rights
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