Falling stock markets and annuity rates have wiped millions of pounds off workers' pension funds.
The FTSE100 has fallen by 15pc since May and new research from Aon Hewitt, the pensions consultant, shows it is having a devastating impact on the projected income of workers saving in company defined contribution pension (DC) schemes.
In its latest DC index tracker report into the £500bn DC market, it said that a 30 year-old’s expected retirement income has fallen from £19,238 to £18,399 a year, since the market turmoil began three months ago.
The situation is worse for workers in DC schemes who have retired over the summer – or are about to retire. They have been hit by a double whammy of tumbling share prices and sliding annuity rates, which are 5pc lower than they were in June. Annuity rates falls have knocked around £500 a year off their pension income in retirement, Better Retirement Group said.
Pension experts said that the market falls highlight the fragile nature of DC, which are the pension fund choice for employers following the demise of generous final salary schemes.
Earlier this month, research from PwC’s revealed that plummeting stock markets have left many DC pension savers feeling they are in a worse position than if they had kept cash savings.
It said that a 40 year-old who has been paying 5pc of his gross salary for the last five years into his DC pension pot, equivalent to £250 per month would have made around £13,000 of contributions. Yet the value of their fund is still around £13,000 and potentially even less due to the charges levied by schemes.
John Foster, benefits consultant at Aon Hewitt, said: “This quarter’s index has seen the cost of buying annuities rise to its highest rate since we began tracking the defined contribution market in 2007. Combining this with high market volatility and an uncertain economic climate has had an impact on the value of pension pots for DC scheme members in the UK – they have significantly dropped in equity value.”
Tom McPhail of Hargreaves Lansdown said: "DC pensions are by their very nature unpredictable; investors can and will lose out as a result of unexpected movements in the prices of shares and bonds close to the point of retirement.”
Most private sector companies have closed defined benefit because of crippling deficits, rising life expectancy and poor investment returns. Just two FTSE 100 companies, Amec and Shell, still offer final salary or career average pension schemes to new staff, according to Lane Clark & Peacock LLP, the consultants. Instead, workers in the private sector are now encouraged to join DC schemes, which are fundamentally different and inferior to defined benefit schemes.
Final and career average salary schemes give workers pensions based on their salary. With a DC scheme, your pension income depends on the amount you and your employer contribute, charges, investment performance and annuity rates.
Mr Foster added: “Investing in a number of different types of assets to spread the risk, and taking a lower risk approach to ensure stable fund performance in the years immediately before retirement, will help to avoid the effects of short term stock market volatility.”