Why do falling stock markets matter so much to pension investors?

Because the majority of their money is likely to be invested in shares, whatever type of pension scheme they are in. With the British stock market falling 31 per cent in 2008, European stocks dropping more than 40 per cent and Chinese shares crashing by 65 per cent, pension funds have taken a hammering. Those seeking alternative places for their money have fared little better. The prices of many bonds, property assets and commodities have also fallen in the past 12 months.

Who will be worst off as a result of the share price falls?

The estimated ten million-plus people in money-purchase schemes, where their eventual pension is dependent on the investment performance of their fund. Someone who started 2008 with a pension pot of £100,000 invested in the stock market would now be sitting on a much reduced pot of £68,000. Twelve months ago the £100,000 pot would have purchased an annuity, or pension, of £7,800 a year, based on an annuity rate of 7.8 per cent. Today, with a smaller pension pot of £69,000 and a lower annuity rate of 7.6 per cent, the resulting pension would work out at £5,244.

What about those on final-salary schemes? Are they better off?

Yes. The estimated 8.5 million people in a final-salary scheme benefit from a pension that is dependent on their salary and years of service. However, as Tom McPhail, head of pensions research at Hargreaves Lansdown, the independent financial adviser, says, the current market turmoil and the impact of the recession may affect even those in final-salary schemes. A study published this week by Deloitte, the consultant, reckons that falling stock markets have opened up a £130 billion deficit in the final-salary pension schemes of Britain’s blue-chip companies. If a company with a final-salary scheme goes bust, the employees could find that they do not receive as big a pension as they were expecting. Although the Pension Protection Fund is supposed to fill the gap, it will guarantee only 90 per cent of the expected pension and there is a cap of £27,770 on the annual amount. Many companies are abandoning them in favour of money-purchase schemes, where the employee, rather than the employer, shoulders the investment risk.

How do public sector pensions match up?

Very well indeed. Public sector final-salary pensions are about as copper-bottomed as you can get. The pensions are backed by the Government and about five million people are on schemes that will enable them to retire at 60. But Mr McPhail says the growing gap between taxpayer-funded public sector schemes and less generous money-purchase schemes is triggering calls for a levelling of the increasingly unequal playing field.

What’s happened to the basic state pension this year?

In his PreBudget Report, Alistair Darling said that the basic state pension for a single person would rise from £90.70 to £95.25 a week from April, while the minimum weekly income guaranteed to a single pensioner will go up by £6 to £130. Every pensioner will also receive a £60 one-off payment in January to help with energy bills.

Explore Economics

• Pre-Budget Report 2009

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