Pension funds rebound in value

The value of assets in employees’ defined contribution pension funds have returned to levels last seen nearly a year ago driven by rising share prices in July, according to Aon Consulting.

The research put the collective value of DC pension funds at £451bn, up by £31bn, or nearly 7 per cent, from June. This left the combined pension funds worth just £1bn more than they were in September 2008.

The group said the value of these pension schemes had risen by £31 billion or 6.8 per cent during July, largely due to improvements in world equity markets.

But the schemes have endured a turbulent 12 months, with their value dipping to just £344bn in March.

Workers are increasingly having to save for their retirement through defined contribution schemes after the majority of companies closed their more generous final salary pensions to new members. A number of companies, including Fujitsu, IBM and Interserve, have recently announced consultations about or plans to close their UK final salary schemes to existing members.

Under final salary schemes employers state how much a pension will be worth on retirement, based on the number of years a worker has belonged to the scheme and their pay immediately before they retire.

But people with defined contribution schemes have to shoulder the risk of investment volatility and increased life expectancy themselves.

Aon said the fluctuation in the value of defined contribution pensions seen during the past year showed how volatile the value of these schemes could be.

”These figures look promising as we return to asset figures roughly at the same value as they were a year ago,” said Helen Dowsey, head of defined contribution at Aon Consulting.

”However, this month’s figures serve to underline the volatile nature of defined contribution investment. Someone retiring at the end of July may have a significantly higher projected retirement income than someone retiring a month before.

“These volatile conditions highlight the need for workers to pre-plan for their pension, and understand and regularly review their investments, whose value can change dramatically in a short space of time.”

The findings follow a recent report from KPMG that the pension industry will reach ‘tipping point’ this year as the cost of trying to close the funding shortfalls of their defined benefit schemes would be equal to the money they set aside to cover new pension benefits earned by workers.