Connected Research

Union policy research in the 21st century

DC pots regain September 2008 value

with one comment

Aon Consulting has produced an assessment of the total asset value of UK workers’ DC pension accounts as at the end of July. This shows that the total value of UK defined contribution pension pots had risen at the end of July to a figure of £451bn – fractionally higher than the £450bn that they were in September 2008 when the existing credit crunch turned into something rather nastier.

The sum is also considerably higher than the £344bn which was the comparable value for March, with the recent increase in performance owing much to rises in the stock market over the last few months.

The rise is very welcome but there are four, perhaps rather obvious, things to point out:

– this does not mean that the recession is over

– DC schemes are, evidently, incredibly volatile vehicles for pensions saving. Someone cashing in their pension in March 2009 would have a much lower pension than one doing so in July (although, in truth, why – except in cases of absolute personal necessity – would you have chosen to cash in your pension in March?) At the same time, we should remember that DC-based pension funds are a lot less of a rollercoaster ride than such figures apparently indicate: funds which do experience such volatility are those which remain invested in equities right up to the point of being cashed in, whereas most advisers would advise switching to less risky funds than equities-based ones in the years before retirement expressly to avoid the problems of stock market crashes. So, the lesson is clear that DC pensions investments need to be regularly reviewed – and not only when lifestyle changes are imminent. Access to clear, affordable advice is paramount.

– pension funds are very exposed to short-term fluctuations and it is easy to base considerations on these when we need, in contrast, to remain focused on them as long-term investments. A rise in the total assets in DC pots of 31% in the four months since March is evidence of that. This is also something worth bearing in mind should the stock market fall back in the next period, as many are expecting. The lesson is the same for employers with defined benefit schemes, many of which self-evidently ought to have seen similar returns from their equities-based investments since March.

–  the re-gaining of the pre-recession asset value for DC pots is clearly a landmark. Of course, this represents ten months in which, ultimately, pension pots have trod water rather than achieving growth – but, given the depth of the recession, this actually represents something of an achievement, at least for people in mid-career. Nevertheless, people retiring and cashing in their DC pots in the last ten months would evidently have suffered from lower pensions (and will evidently continue to do so for the rest of their time in retirement).

At the same time, the model of people ending their jobs one day and drawing their pensions the next is becoming increasingly outmoded and, in the future, workers may be better placed, at least in normal times, to time their pensions and work options better, not least once the review of the default retirement age has concluded that the default age (65) should be swept away. In recession-hit times, with companies going bankrupt and workers losing their jobs in the ones that remain, or in ones that insist on using performance management systems to manage people’s exits from its labour force, that’s much more difficult to achieve – and it will remain so even after a recession until employment comes down and workers in their 50s, for example, are able to find employment.

One of the lessons of this recession is that workers increasingly located in DC schemes are going to need better protections at economically vulnerable times when faced with job loss in the period before retirement. The recession clearly indicates the value of savings outside pension schemes – workers made redundant in March might have been able to rely on other savings to tide them over until, for example, July. But, for others, perhaps some thought needs to be given to establishing some kind of government-backed bridging scheme for workers made redundant and who need to be tided over until their pension pots have regained some semblance of normality.


Written by Calvin

19/08/2009 at 11:42 am

One Response

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  1. Interesting stuff here. The real lesson is perhaps that DC schemes potentially pass the whole responsibility for managing one’s pension fund onto the individual. This is absurd. There is absolutely no realistic prospect that any more than a tiny minority of people would either want to take that level of responsibility or be able to. That means that the trustees of such schemes (or, increasingly, largely toothless ‘management committees’ where the schemes are contract based) have an absolutely pivotal role in setting up effective lifestyle investment strategies. However, these rely on known retirement dates for the scheme’s membership – yet fixed retirement dates are largely a thing of the past. A long-term problem the pensions industry has given little or no thought to. And I don’t know the answer either – other than to argue for an underpinning level of retirement income for all based on a fairly high proportion of UK average earnings. As the DB past fades to be replaced by an inadequate DC future, the state’s provisions will become increasingly significant, both economically and politically. The new state arrangements, to come into effect in 2012, are a step in the right direction, but a pretty small one in the rapidly changing circumstances.

    ben marshall

    19/08/2009 at 6:23 pm

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