Facing the facts

Millions of workers are receiving the grim news that their retirement pots have taken a severe hit over the past year.

Richard BrighousespotlightDavid Bird, retirement practice principal, Towers Perrin

Towers Perrin has found employees’ understanding of the current economic situation can vary enormously from company to company.

Like many other consultancies, it has been running a series of seminars for its clients’ defined contribution pension scheme members in order to keep them informed about the impact of the stockmarket downturn on their benefits.

“The questions we have been asked by employees have been quite interesting,” says David Bird, a principal in Towers Perrin’s retirement practice. “The majority have acknowledged the fact that there is a problem and are aware of the credit crunch, but the picture is very patchy and depends a lot on the effort the employer has made and the interest levels of that particular group of employees.”

He says one colleague who presented to members at a company that had just switched from a defined benefit to a DC scheme faced no questions about the markets but plenty about the safety of individual funds.

A different colleague giving a talk to the staff of another client, a financial services call centre, fielded a number of quite sophisticated questions on whether the scheme’s cash fund qualified for the Financial Services Compensation Scheme and the level of counter-party risk other funds were exposed to.

“These are all spot on questions but we have faced others like ‘If I invest in an equity fund won’t the fund manager hold other asset classes too?'” Bird notes. “These represent a lack of understanding but at least they are thinking about diversification. If you do get out and make the effort it can make a difference and a number of the questions we were asked have heartened me.”

The consultant’s experienceexpert viewColin Williams, executive director of DC business, FidelityFidelity advocates emphasising the long-term nature of pension investing to encourage members to stick with their schemes.

The fund group stresses the importance of pointing out that by drip-feeding money into the market, savers will be picking up units at low prices that will serve them well in the longer-term.

Colin Williams, executive director of DC business at Fidelity, says that the firm’s latest research shows that in the 15 years to end of September 2008, the FTSE 100 rose 169 per cent but anyone who missed the best 10 days would have seen only a 69 per cent return. If they missed the 40 best days they would have actually endured a 32 per cent loss. Indeed the single biggest one day rise in the FTSE was on 19 September this year at nearly 9 per cent although the market ended the month over 20 per cent down.

Williams says: “The current financial crisis highlights the value of communication to members. I would urge companies that do not do this regularly to consider the benefits of a long term communication strategy, so that members are helped into seeing their pension account as a long term investment.

“It’s important that clients communicate with plan members openly but they must also remember that suddenly contacting members may in itself send a message. Sponsors tend to communicate with members well when they join the pension scheme but many don’t continue with good quality ongoing communication.”

Research by Prudential earlier this year found that an alarming 48.3 per cent of workers had halved their pension contributions over the past 12 months as they struggled to make ends meet.

Emphasising the positivespotlightAndy Cheseldine, senior consultant, Hewitt

There are fears that hundreds of thousands of workers that are five to 10 years away from retirement will be unable to recoup the recent losses in their pension pots as they enter into lifestyling programmes that automatically switch their assets out of equities.

The vast majority of default funds in defined contribution arrangements use a lifestyling feature that migrates the savers’ pension pot into lower risk assets such as cash and fixed income as they approach their nominated retirement date.

Andy Cheseldine, a senior consultant at Hewitt, says this equates to half a generation of workers that will effectively be crystallising their recent heavy losses in the stockmarket with little or no chance of recovering it.

“Those that need to be worried are the people five to 10 years from retirement because they struggle to get it back before they switch out of equities,” he says.

Besides the unpalatable choices of contributing more, working longer or living on less, the other option is to go for the ‘last chance saloon’ scenario and opt out of the lifestyling default to pursue a high risk equity strategy in order to try and recoup their losses.

Helen Dowsey, principal of Aon Consulting’s Benefits Solutions division, says: “If someone has got a small pension pot they may be willing to gamble, particularly if they have assets elsewhere, but it all depends on the individual’s appetite for risk.”

The last chance saloon