Pensions in the credit crunch

The forecast for recovery is uncertain. Some commentators say this year, others are more cautious, and some think there is yet more pain to come.

So where does that leave pensions? I think iIt’s best to address this by looking at four separate areas:

- Employer-sponsored pension schemes;

- Personal pension schemes;

- Member directed pension schemes (SIPPs and SSASs);

- Retirement.

Employer-sponsored pension schemes

Pension schemes were always seen as an integral part of a workforce’s overall benefits package with many employers making valuable contributions into defined benefits (DB) or defined contribution (DC) schemes.

However, in the past few years we have all become aware ofseen the demise of DB schemes, mainly due to the open-ended cost to employers of making such a pension promise. The recent period of economic uncertainty can only accelerate this process.

With DC schemes, the issue is slightly different as the investment risk sits squarely with the pension scheme member, i.e. the employee. But I think that the overall consequence is the same – and when an employer is looking to control costs the pension scheme can be an easy target.

Poor investment markets are also likely to have increased many schemes’ existing deficits, making future funding even more difficult. This could force schemes to reduce benefits or, if the worst comes to the worst and the employer goes into insolvency, the whole scheme could end up in the Pension Protection Fund (PPF).

The strength of the ‘employer covenant’ is a hot topic in the world of pensions and is particularly relevant to scheme members whose benefits are above or close to the maximum provided by the PPF.

Personal pension schemes

When times are tough savings are often the first expense to be cut. In the last year or so, there has been no shortage of surveys showing clear evidence of this.

For people who continue to contribute to a personal pension the choice of investments is perhaps more important than ever, and a good understanding of risk and return is vital. When planning personal pension contributions I would also suggest working to a target income at retirement is advisable.

SIPPs and SSASs

For member-directed pension schemes, similar general comments apply as for personal pensions. However, there will be particular circumstances where both SIPPs and SSASs offer greater investment opportunities.

SSASs have the ability to loan-back up to 50% of the value of the pension fund to the employer. Generally this can be at an interest rate of just one point above the Bank of England base rate, considerably lower than the going rate for raising capital. This could provide small companies with a viable alternative way to raise capital to help with cash flow or simply to tide themselves over in the short term.