As has been widely reported in the press this week, there have been significant movements in the stock market in reaction to the tax cutting plans announced by the UK Government, which has had a significant and unprecedented impact on the pensions industry. Here we provide a brief explanation of what has happened, and how this may impact your pension.
What has happened?
The level of public borrowing required to fund the tax cuts announced by the UK Government shocked investors and as a result, the cost of borrowing in the UK surged and the value of Gilts (government bonds used to fund public borrowing) and the pound fell. Many pension funds, which invest in Gilts were forced to start selling assets to make up the shortfall created by the fall in the value of their Gilts which caused prices to fall even further, requiring further assets to be sold.
The Bank of England has subsequently stepped in and bought £65bn of government debt to help stabilise the market in the short term, although the situation requires careful monitoring.
What is the impact to my pension?
The impact this may have on your pension will depend on the type of pension you have, and how close you are to retirement.
If you are a member of the Defined Contribution Section, both you and the company pay a set level of contributions into your Pension Account while you are employed. These contributions are used to buy units in your chosen investment fund, which go up or down in value depending on the performance of your fund. When you reach retirement age, the value of your fund can be used to provide you with a cash lump sum, purchase an annuity (a contract with an insurance company that pays you an income for the rest of your life), or be used more flexibly (by transferring your benefits to a drawdown arrangement that would allow you to take a series of lump sums or a regular income).
It is important to remember that pension savings are a long-term investment. If your savings are invested in a Target Date Fund and you are in the early/mid-life stages of your investment journey, your fund will be invested in higher risk funds to achieve growth over a long period of time. In these stages you can expect to see movements in the value of your account day to day, but in the long term your fund should increase in value.
If your savings are invested in other funds on the investment platform, the extent that your funds’ value is affected by the recent market movements will depend on the type of fund that you are invested in. It is important to note that as interest rates rise, the capital value of Government Bonds and other Fixed Income instruments fall in value.
As such, even if you are close to retirement and invested in a Target Date Fund whilst, your fund will be invested in less risky funds to protect your fund value, it may still increase or fall in value. It is therefore important that if you are considering taking retirement within the next 6 months, that you carefully consider the timing of when you disinvest your pension fund.
If you are a member of the Defined Benefit Section, you will be provided with a certain level of income when you retire, based on the length of time you have paid contributions to the Scheme and your Pensionable Earnings close to retirement. Investment risk is borne by the Company, not the member, although if you have made any AVCs these could be exposed to market movements as explained above.
The Defined Benefit Section of the Scheme remains well funded with a prudent and conservative investment strategy. As a result of the recent market movements the funding of the Scheme has continued to improve and is currently in excess of 150% funded on a technical provisions basis. Members should therefore not be concerned about their benefits held in the Defined Benefit Section of the Scheme as a result of the recent movements in the stock market.
The Trustees are in regular dialogue with their Investment Advisers and Managers to continually review the current situation and take action if needed. Further updates will be provided on the web site as and when necessary, so please check back.
Further information on the Scheme’s investment strategy can be found in our Statement of Investment Principles.
For members of the Defined Contribution Section of the Scheme, further information on the range of investment options available to members can be found on our web site and also in the DC Chair’s Statement.
For members of the Defined Benefit Section of the Scheme, further information on the Scheme’s funding position and how it is assessed can be found in the Summary Funding Statement.
Additionally, you can also find out more information along with impartial and free guidance from the MoneyHelper service.
If you are close to retirement and are unsure about how the recent market moves may have affected your pension, you should consider speaking to an Independent Financial Advisor. You can find out how to obtain independent financial advice on the MoneyHelper web site and also the Unbiased web site.< Back to News