Private Sector Pensions Take a Beating

Falling annuity rates and roller coaster stock markets mean private sector workers claiming their pensions today will be 18% worse off than colleagues who retired three years ago.

Pension CostsPensions are on everybody’s mind at the moment, with public sector workers striking over changes to theirs and fewer private sector workers paying into one.

Now, new research by actuarial consultancy Aon Hewitt has shown just how badly private sector pensions have been hit – specifically “defined contribution” or DC pensions.

Final and career average salary schemes link pensions to an individual worker’s salary, giving them more security about much they will receive when they retire.

DC pensions, however, depend on a variety of factors such as contributions, charges, annuity rates – and most importantly, stock markets.

With the abandonment of final salary pension schemes by most private sector companies, DC pension workers retiring today face a bleak outlook. Aon Hewitt’s DC Tracker Index has shown that the buying power of DC pension pots has fallen significantly since 2008.

Tom McPhail of Hargreaves Lansdown said: “DC pensions are by their very nature unpredictable; investors can and will lose out as a result of unexpected movements in the prices of shares and bonds close to the point of retirement.”

By contrast, public sector pensions connected to career-average salaries have effectively no risk attached to them.

Moneyhighstreet comments: “If you’re on a DC pension, there are several things you need to watch out for.

“Combined contribution rates for a private sector worker amount to approximately 9% of salary. By comparison, a final salary scheme contributes about 20% of salary. So at current levels, a private sector worker isn’t going to be able to build up a pension pot similar to a final salary scheme without contributing a lot more.

“Annuity rates are also volatile. They determine the pension income for DC pensions and are linked to the interest rate. In 2008, they reached 7.73%, but today are just 6.73% – lowering the payouts of DC pensions.

“Of most concern to people will be the connection of the value of their pensions to the stock market. Each pension is invested in a fund, and doing the research and finding the best-performing fund for your pension could help your investment.”

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