Jeff Salway: Aon's move may lead to a deepening of the pensions crisis

Published on Friday 10 April 2009 21:24

ONE company has succeeded where the government and financial services industry have failed in keeping the pensions debate in the public eye. When one of the UK's biggest pensions consultants slashes the amount it pays towards its employees' pensions, As Aon did this week, the message cannot be ignored.

Aon is not the first to do this, but as a leading pensions adviser its actions carry real weight. Other large employers will inevitably follow suit, particularly if it means they don't have to implement measures that will provoke more outrage, such as redundancies and pay cuts.

Whether cutting future benefits should spark less of an outcry than cutting what its workers are paid now is a moot point in itself. Either way, as government and employer pension provision continues to decline, Aon's decision underlines yet again that the onus is firmly on individuals to take responsibility.

The problem is that, as survey after survey reveals, too many of us are failing miserably in providing for a half-decent retirement. This isn't a credit crunch phenomenon – as the rise in the savings ratio suggests, hard times breed prudence, particularly when the notion of property as a failsafe retirement investment is proved so flawed.

The introduction of the personal accounts regime in three years will boost the number of people saving in company schemes, but it is already encouraging companies to reduce their own contributions towards the 3 per cent minimum that will be required under the regime.

So, the buck still stops with the individual. As more companies follow Aon's lead and cut the amount they pay into employee pension pots, however, one of the least likely outcomes is that scheme members opt to increase their own contributions.

In contrast, the most likely outcome is that an already grave pensions crisis will worsen.

NEARLY 30 million people have saved money with National Savings & Investments, the government-backed provider. More than 20 million of them hold (or held) premium bonds, something of an institution.

Premium bonds are more popular than ever, partly a product of savers opting for government shelter in a time of uncertainty, regardless of the fact that NS&I is now far from alone in offering this security. Yet the increase in premium bond holders has been mirrored by a decline in their value as a savings product.

Of those lucky enough to win a prize (and bond holders have just a one in 30 chance of winning anything in a given year), 96 per cent will get the minimum 25 (reduced from 50 as of this month). Just 0.007 per cent of bond holders will win more than 5,000. Does this sound like a good investment?

Other government-backed institutions, such as Northern Rock, offer better savings returns, even with savings rates at all-time lows. They may be more fun than the average savings or investment product, but premium bonds can no longer be taken seriously.

STOCK markets have offered plenty of food for thought lately. With the FTSE recovering lost ground in the past month or so, the talk has been about stabilisation and even recovery.

The fact is that we won't know what the recovery looks like until it is well underway and that means most investors will lose out on some of the biggest gains the markets can offer.

This is well illustrated by a few statistics unearthed by Alan Steel. While apparently no-one on this side of the pond was looking, the Dow rose by 25 per cent between 9 March and 9 April. US small companies are up 37 per cent over the same period and the value line index, in which US stocks of all sizes are equally-weighted, has risen by almost 50 per cent.

More stark is the 83 per cent bounce in financials, including banks. As Steel points out, investors who pulled everything out of the US when markets nosedived have missed out on those gains.

Of course it depends on an individual's risk attitude, investment time-frame and objectives. But the figures produced by Steel offer a reminder that those who drip-feed their investments through regular savings have a big advantage over investors attempting to time the markets.