Final salary pensions slump 15% in value

Published on Saturday 10 January 2009 13:52

A TYPICAL final salary pension scheme lost 15% of its value last year from falling returns on assets, meaning higher company contributions will be needed to get them back on track, experts are warning.

Wildly fluctuating stock markets in 2008 hit most of the asset classes in which pension schemes invest. UK equities lost approximately 30% of their value and corporate bonds lost 6%. The drops were partly offset by fixed-interest UK Government bonds which returned 14%.

Fraser Smart, manager with Buck Consultants, said: "It is clear that there has been a substantial destruction of value in defined benefit, or final salary, pension schemes during 2008. This will need to be rectified in the future by higher company contributions if, as widely expected, markets do not return to previous levels in the near future."

The fortunes of individual schemes varied greatly over the year, dependent on the assets held by individual managers. Smart said that "active managers" who tried to beat the relevant index achieved a wider spread of results than normal because of the uncertainty in markets. While some equity managers achieved results 8% above the market return, the average scheme was down 15%.

Smart also warned that he expected to see a substantial number of company failures this year, leading to a higher than expected number of schemes ending up in the safety net of the Pension Protection Fund (PPF).

Smart said: "There is a concern that benefits in the PPF could be cut back if there are too many claims and insufficient scope to raise funds through levies.

"I would urge concerned employees and employers to take this up by writing to their local MP to ask that similar levels of protection are offered to pension schemes as to bank savings."

The PPF, set up in 2005 to bail out the pension schemes of insolvent firms, is already under unprecedented pressure. There are fears that Waterford Wedgwood, which fell into administration last week, will add a 50m burden. Most of the UK final salary pension scheme of the insolvent Lehman Brothers investment bank was taken on by the PPF in October.