Employers offer fund members cash handouts as pension crisis looms – should we all cash in our pension?
Pension deficits are growing at a number of high profile companies, leading to increasingly desperate measures as they try to plug the gaps.
Day by day, as the financial markets continue to struggle, the pounds wallows in the depths, interest rates are cut and gilts go negative, the pension crisis that the media has been predicting for months and years is becoming more of a reality.
The latest indicator reported by pension experts is the return of so called “Plasma TV deals” in which employers offer members a large cash sum to exit their pension scheme (which, it was assumed, the recipient would rapidly spend on the most recent technology).
While a plasma TV might not be the best investment, today’s market uncertainties do mean that any pension fund could be at risk. This is leading to a wholesale re-evaluation of how we plan for retirement and cashing in a pension is seen by many as the best way to take control of your investment in these uncertain times.
All that glitters is not gold
Companies on the FTSE that offered the so-called “gold plated” pension schemes are among the first to feel the biggest impact. These are the guaranteed final salary schemes that used to be so common but are now active in only 11 FTSE-250 companies.
Perhaps the most high-profile case has been that of BHS. The BBC cites its pension deficit of more than £0.5bn as the primary cause of the 88 year old retailer’s collapse earlier this year.
Other companies are facing similar issues, however, and Britain’s biggest retailers including Tesco, Sainsbury’s and Marks and Spencer are facing a £6bn increase in their pension scheme deficits.
The most recent case to hit the front pages is that of the Royal Mail and Post Office, who have announced significant cuts in their pension schemes that will affect more than 100,000 workers. The cuts were described by a spokesman as unavoidable in the current market conditions. The facts for an individual can, however, be little short of devastating. One manager in his 40s was told that his projected pension has collapsed from £38,000 a year to just £18,000 as a result of the cuts.
The Royal Mail and Post Office, which operate identical pension schemes, made the first announcements of cuts in February. Since then, market conditions have deteriorated even further than they could have expected.
We have seen the result of the EU Referendum, historic lows in the bonds market, cuts in interest rates and a slump in the value of the pound. On top of all this, some government gilts, which are often seen as being the safest of investments, returned a negative yield in August.
All of these have combined into the pension fund equivalent of a “perfect storm.”
Retirement in the 21st Century
The pensions market has seen many changes over the years. Final salary schemes became “career average schemes.” Then these schemes were closed to new entrants. This latest development can be seen as a further evolution and we need to adjust our thinking accordingly to decide how best to plan for retirement in the 21st century.