Hard times for pensions can hit many

Dec 9 2008 by Elizabeth Haggis, The Journal

THE effect of the current turmoil in global financial markets on the value of pension scheme investments is of great concern to pension scheme employers, trustees and members.

In small self-administered schemes (SSASs) and self-invested personal pension plans (Sipps), the same people tend to be members, trustees and (in SSASs) controlling directors of the employer, so the potential for a large financial headache is multiplied.

While pensions are long-term investments, the approach of “riding out the storm” is unlikely to be appropriate, especially when retirement is imminent or hopes of early retirement are receding fast.

Succession planning in a family-controlled company can often be thrown into chaos where financial circumstances mean a senior controlling director cannot afford to retire.

Funding plans

SSASs and Sipps are usually set up on a money purchase basis, meaning there is no definite promise of a particular level of benefit.

However, funding can be targeted to produce a particular level of pension, but this requires regular monitoring to ensure enough is paid in to meet the targeted benefits.

The value of equities has dropped, so if a funding target is in place where a scheme has volatile investments, an immediate update on the situation should be sought with a view to getting back on course as soon as possible.

Investments

Some SSASs and SIPPs contain investment policies taken out in the name of specific members, as well as the more usual type of investments such as loans, equities and property.

“Lifestyling options” are often in place to ensure that the nearer a member gets to retirement, the more risky equity investments are switched to bonds, cash and/or gilts. This might not be appropriate in all cases, so these investments should be reviewed.

Switching volatile investments into more stable investments could generally be appropriate but only after independent financial advice.