John’s Blog No. 23 Pension Mechanics

If you belong to a Company or Private Pension Scheme, every month money is deducted from your wages as contributions to the scheme; your employer will also contribute towards the scheme. He will  possibly contract you out from the State second pension claiming a rebate from National Insurance.

These contributions are invested in a pension fund on your behalf where they should accumulate and grow to give an income when you retire; the level depending on the amount contributed, over what period, and on how well the funds are managed.

Many of the schemes are run and managed by the major Insurance Companies, although large Company schemes have their own investment funds. How well these funds are managed and how secure they are depends on the investments made; the large Insurance Companies are secure and well regulated, but Private Companies do fail and funds become minor creditors, as many members have found to their cost.

In general schemes are well managed and perform well, but many give poor value for money and over the long period of 40 years are eroded by excessive charges, State taxation and levies. At fruition they are further degraded by the tax free lump sum, which requires a third increase in contribution premiums and also by poor annuity rates which equals a further third.

Yet in spite of all this wastage and cost to the pension savers, individual members take little interest in their funds and the future security and prosperity in retirement, until they get near the event. As a result the funds disappear into a black hole and, if you are lucky, reappear forty years later in an uncertain state which may or may not support you in old age.

You deserve all you get, of course it all is so complicated and hard to understand, but is it? You do not have to understand the detail only the results; are your funds building up the way they need to do?: are they well managed?: are they secure?; do they give value for money?

Private pension schemes give annual statements, which is worth spending a little time on, but these are often not presented in a simple form. Ask your provider to clarify these if needed; only pressure will give clearer and better statements and recognition of customer rights.

The statement should give the current fund value, total units, additions and values, contributions made; forward pension projections and any charges. Comparison with previous statements should highlight movement; changes in unit value gives growth directly, whilst fund value shows accumulated contributions plus growth.

Forward projections of income at retirement are particularly confusing, given for different growth rates, they sometimes take account of inflation, in real terms and sometimes in today’s values. Over the past 20 years the expected performance has been reducing dramatically, so that contributions to give a good pension when taken out now appear inadequate. This is a form of mis-selling, promising one thing and delivering something much lower and is a major problem in private pension provision, reflecting the lack of guarantees and the member bearing all the risks.

Company and Public Sector schemes are less forthcoming, with little information being given, in defined benefit schemes your pension depends on number of service years and final or average salary, with a take it or leave it and almost charitable attitude, although final pensions are usually more generous.

In many ways there is little you can do to influence the final outcome, due to the long timescale, by the time you find out your pension savings are not meeting expectations, it is too late to do anything about it. This needs to change, but will only occur as a result of  active involvement and pressure from members.

Nevertheless there are things that can be done and remedial action that can be taken, but this will only occur by careful monitoring of scheme performance from the word go and this will be dealt with in the next blog.

 Savings   Annuities   Public Sector   NHS  Teachers   Police   Local Government    Hutton   State