All change, please

Research confirms that most people don’t know much about pensions and investments. But the public sector pensions review in the UK may force many more …

people to bring their knowledge up to scratch, even members of defined benefit public sector schemes who had thought their pensions were the best the country had to offer.

A study carried out by YouGov on behalf of BNY Mellon Asset Management revealed that over half of its respondents’ knowledge of investing was low or very low. Less than 30% of respondents to the survey claimed to have moderate investment knowledge.

Historically, pension arrangements for public sector workers have been generous, with most offered membership in final salary defined benefit schemes. But these pension schemes are now under review.

Last week, Lord Hutton of Furness, published the results of his independent review of public service pensions. The report, though welcomed by most actors in the industry, may also lead to some significant changes in the way these schemes work and in the resulting retirement benefits members can expect to receive.

Lord Hutton’s main recommendation was that the government should replace existing final salary pension schemes with a new career average scheme. He also proposed that Normal Pension Age, that is the age at which a member of a pension scheme normally becomes entitled to receive his or her pension under the scheme rules, will be linked to State Pension Age.

Furthermore, Lord Hutton proposes that each public sector pension scheme should include a mechanism that will adjust contributions according to rises in life expectancy, which means that members’ contributions could increase.

The government has also proposed pension contribution increases, which according to the London Pensions Fund Authority could damage the whole vision of Lord Hutton’s report.

“There remains a concern, that the government’s plans to raise the level of employees’ pension contributions could lead to significant numbers opting out of public sector schemes, potentially scuppering Lord Hutton’s plans before they have the chance to take effect,” the LPFA said.

This danger of having masses of civil servants opt out of their occupational pension schemes is very real for the success of private pensions in the UK, considering that a significant percentage of people already have no pension arrangements in place.

According to the BNY AM research, 43% of respondents had neither an employer nor a personal pension. And, if the LPFA’s concerns are founded, that percentage could potentially increase.

©2011 funds europe

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