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February 27, 2009 6:57 pm
An increasing number of companies are considering offering their employees self- invested personal pensions (Sipps), which provide savers with a wide range of investment choices.
But not all advisers are convinced that Sipps are better for workers than ordinary money purchase pension schemes.
At present, only around 7 per cent of businesses offer a group Sipp to their employees, but many more are now consulting accountancy firms to assess the costs of offering this benefit.
One in four businesses in the UK is already considering offering its employees a Sipp as their main pension, according to a survey by PricewaterhouseCoopers, the accountants.
As well as allowing employees to use their pension to invest in their employer’s shares, group corporate Sipps can offer savers more flexibility than traditional defined contribution (DC) schemes.
PwC says it is advising a number of FTSE 100 companies and other accountancy groups agree that Sipps could provide a better incentive for employees to save more towards retirement than DC schemes.
DC pensions have taken over from final salary schemes as the retirement benefit offered to most employees in the UK. In these, companies make a contribution towards their workers’ retirement savings. These schemes are less expensive to run as they do not guarantee a set income for retirees. Instead, the money is invested and used to provide a retirement income.
But massive falls in global stock markets have hit pension values and dented confidence in the merits of saving for retirement.
On average, workers have lost more than a third of the value of their DC pensions in the last year, according to Aon Consulting.
Since the credit crunch took hold in September 2007, £140bn has been wiped from DC pension schemes.
People with decades to go before retirement have time to recoup these losses, but those who are close to retirement may struggle to rebuild their funds.
Typically, a 60-year-old paying 10 per cent of his £25,000 annual salary has seen his total projected pension fall by 36 per cent, according to Aon, meaning he can now expect to receive £10,900 annually for the rest of his life, compared with the £17,100 that was forecast in September 2007.
Marc Hommel, UK pensions leader at PwC, says the crisis has led employees to accept the need to take responsibility for their retirement savings. He believes scheme holders want their employers to give them access to more flexible savings opportunities.
“There is no point in a business spending large amounts on generous pension arrangements that are undervalued by employees,” he says. “We are seeing more imagination in the type of pension arrangements being offered and the vehicles being used to deliver these.”
However, Jason Butler at Bloomsbury Financial Planning says that dividing DC schemes and Sipps on the grounds of choice is not entirely fair.
Some DC schemes have a wide choice of investment funds, including low-cost index funds and specially negotiated terms with external managers, he argues. In many cases, there is a choice of a “lifestyle” fund selection, which starts off with a higher allocation to risky assets, gradually moving to lower-risk funds as members near retirement.
By contrast, some group Sipps have a limited core range of funds, with the option to invest in more only provided for an additional cost. Sipps that offer investors the widest possible range of asset classes tend to be limited to savers with large funds.
“Full Sipps are rarely good news for those with funds below £150,000,” says Butler. “The reality is that most employees don’t need a Sipp if the pension provided by the employer has a wide range of low-cost index funds.”
In its annual survey, Watson Wyatt, the investment consultant, found that the average contributions made to DC schemes by both employer and employee had risen in the last year to 15.3 per cent of salary, from 14.7 per cent. This is higher than the 8 per cent contribution that will be required for all workers from 2012, when they will be automatically enrolled in a scheme.
Although huge falls in fund values over the past year will knock employees’ confidence in DC pensions, Watson Wyatt believes the crisis will lead to stronger and more focused saving options.
Savers interested in calculating the value of their pensions can use www.comparemypension.com, set up by Douglas Baillie, the financial adviser. The site provides users with a summary of their pensions, their future value and compares the cost efficiency of plans.
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