Pension Time Bomb Looms for Thousands

Thousands of savers in closed with-profit pension funds are being given overly optimistic assumptions as to what they will receive in retirement, according to research from comparemypension.com for The Sunday Times.

The independent financial advice website has reviewed almost 1,000 pension plans for clients and has uncovered a “worrying” trend in pension projections for people in with-profits funds that are closed to new business. One Royal London customer asked for a projected value of his fund in five years and the insurer calculated this based on a growth figure of 7% a year, as is standard practice, even though his pension is accruing bonuses at an annual rate of just 1%. Douglas Baillie, founder of comparemypension.com, said: “The worst offenders are the closed or so-called ‘zombie’ funds such as Royal London and Pearl. “These companies are clearly relying on a lack of understanding and inertia by policyholders, while they take actions that will have significant impact on their policyholders’ retirement incomes. “Policyholders need to appreciate that these companies today are not the cosy, trusted mutuals or friendly societies that encouraged the average working person to save for retirement. “These are now either listed or private equity-owned companies with high-profit motives.” The Royal London pension saver would have had a fund of £25,400 based on a projected growth rate of 7% over five years. However, the actual value, when Comparemypension asked how much he would get if he transferred out in five years, was only £17,600 — below the current value of £17,700.

Baillie hit out at such practices: “On the face of it, the pension saver might have thought he’d get a healthy return over the next few years, but the transfer value shows that Royal London isn’t as optimistic as its projection suggests. “Yet we’ve been unable to uncover any communication explaining the consequences of sticking with with-profits funds to the thousands of policyholders affected, other than annual statements that look at past fund performance.” Royal London said: “With this particular type of pension plan, the reason for the unusual relationship between the current transfer value and the projected retirement fund value isn’t that the projected value is poor — it’s that the transfer value is exceptionally good. “This plan provides a full transfer value after the earliest pension date. “Being invested in the with-profits fund, the current value has been cushioned against recent market falls but may well reduce in value over the next few years.” Comparemypension.com advised this policyholder, aged 65, to crystallise his pension benefits, unlocking 25% of his fund as tax-free cash, then scouring the market to get the best annuity rate for the remainder of the pot.

In another case, a Pearl client, who turned 58 this month, was thinking of accessing his pension at age 60. Pearl also used an assumption of 7% growth to calculate the projected value in two years but the last time the fund achieved that level of bonus was back in 1995 — 14 years ago. In fact, comparemypension.com discovered that no bonuses had been applied to the fund since 2001 and its present value was exactly the same — to the penny — as in 2004. Baillie said: “At base, Pearl is assuming that the value of this fund in late 2011, when this client turns 60, will be the same as it was in 2004 — meaning a shocking seven years with no increase at all. “People in these plans should seriously consider transferring out. “It’s clear that insurers, particularly those that run closed funds, do not expect policyholders’ money to grow by much — if not actually fall in value. Charges seem to be wiping out any bonuses being attached to these plans, despite lofty assumptions by insurers of growth at 7%. Pearl said: “The FTSE 100 index is now no higher than it was in January 1998 and this is reflected in the bonus experience of many with-profit policies in recent years. “As a closed-life business, looking after closed policies is all we do and the Pearl Group is constantly seeking ways to improve policyholder returns. “For example, we have just received approval for changes to the policies of the guaranteed annuity rate policyholders of Phoenix and London Life that should improve returns for those with more than 10 years to retirement.”