FOOL'S EYE VIEW
Pick Apart Your Pension Statement

By Christopher Spink
May 25, 2001

A recent survey suggests that most people paying into pensions have no idea how their scheme is actually performing. Many merely assume that they will be able to retire comfortably, as if by magic. But few know whether that is likely or not.

Pension fund consultant William M Mercer, which conducted the survey of 288 companies, found that two-thirds of company pension schemes do not tell their staff how much they can expect to get in retirement from their fund.

The survey also found that on average people only put in a tenth of their salary into pension savings. 3% of this is their own money with the remainder coming from their employer. But on the whole people should now be looking to save nearer a fifth of their salary if they want to avoid an impoverished retirement.

Most employees probably believe pensions haven't changed much in decades. However, the schemes our parents and grandparents benefited from are very different from those currently offered. The state pension has been declining in relative value for nearly 20 years since the link with average earnings was severed in 1981.

Company pension schemes used to depend on your final salary. Your employer would generally give you two-thirds of your final salary each year. This was called a defined benefit scheme. That's changed as people switch employers more regularly and companies can no longer afford such expensive schemes.

Peter Thompson, the new chairman of the National Association of Pension Funds, acknowledged this recently. He explained that companies are finding funding defined benefit pension schemes trickier because people live longer. The average retirement is double the length it was twenty years ago.

British Telecom (LSE: BT.A) will no longer offer new employees a defined benefit final salary scheme. Instead a defined contribution pension scheme will replace it. This means you are told how much to put in to a scheme and shown how much this would give you in retirement, if investments grow at a specific level.

Projecting the eventual benefits of these "money purchase" pension schemes is an inexact science. Nevertheless it needs to be done so that you know how much money you need to put into the pension pot in the first place. Include any contributions from your employer as well.

Unfortunately only 15% of company pensions currently provide online statements and information. Personal pension funds are slightly better at providing their customers with regular statements but these are very complicated documents, which are hard to understand.

Don't just ignore these documents though. That's dangerous. As the AIDS awareness campaign of the 1980s said "Don't die of ignorance". You need to find several pieces of information from them. This will help you assess your pension situation.

- First find out how much money you have put into the scheme and over how many years.

- Then work out the charges the pension fund has taken out of your contributions. This may be very hard to identify.

- Try and find how the fund has performed since you started paying in your money.

- Compare this with the growth of the FTSE All-Share Index. If it's worse, then you may want to consider switching the contributions to a simple index-tracking fund. But beware of any penalty exit charges.

- The statement should show a range of projections of how much your fund will be worth on retirement. These illustrations should be based on the FSA's current guidelines for investment growth, of 4%, 6% or 8% in real terms.

- If your eventual retirement income looks like falling substantially short of two-thirds of your current salary, then you should try and save more, either in a pension or perhaps in an alternative scheme such as an ISA.

- Find how much it would cost to transfer your money out of the pension fund to an alternative provider.

Of course these are very general guidelines. Most pension statements vary considerably depending on the particular provider. They use different projected rates of return and disguise their charges to make their performance look better than it perhaps is.

Many are wholly inadequate and you may have to spend a lot of time on the telephone gleaning the necessary information listed above. But this is a fundamental first step if you want to prepare for a prosperous and worry-free retirement.

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