David Prosser: Your pension has been cut on the sly

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The Independent Online

Fund manager Fidelity International wins this week's prize for statements of the bleedin' obvious. It has published a report warning - though I paraphrase - that people who pay less into their pension schemes end up with smaller pensions.

What Fidelity actually said, to be fair, was that people in final salary pension schemes end up, on average, with total pension benefits worth £30,500 a year, compared with just £13,200 for members of money purchase schemes.

But that's not because these money purchase plans are a rubbish way to save for old age. It's just that the contributions to these schemes tend to be much lower than they are with final salary pensions.

It's a more important distinction than you might think. Most of the employers that have shut final salary pension schemes over the past five years have claimed their reason for doing so was the potential cost of guaranteeing staff a specific level of pensions. If a company promises to pay a set pension in old age no matter how well investments perform in the future, its costs will be dangerously unpredictable.

However, closing a scheme down because its cost in future could be hugely volatile is one thing - slashing the actual pension contributions employers make on behalf of staff is another. But, of course, this is exactly what has happened. While employers have talked about reducing future liabilities, they've actually been busy cutting costs today.

Let's put it another way. Given the same starting contributions, there is no reason why a money purchase pension scheme should not produce the same end pension as a final salary scheme does.

Both types of plans invest in similar assets. The only difference with a final salary scheme is that the employer has to step in if investment returns disappoint. But if returns hold up, there's no reason for money purchase scheme members to be any worse off. They might even end up with bigger pensions.

The reason Fidelity's figures for the pensions generated by the two different schemes are so far apart is that the typical money purchase plan has much less money to work with. Employers moving from final salary to money purchase are using the switch to cut their pension costs.

Fidelity's research suggests that people in money purchase pension schemes are likely to end up with such meagre benefits in retirement they would be better off carrying on working in a job paying the minimum wage.

That's the real scandal of what's happened to occupational pension provision over the past five years or so. The switch from final salary to money purchase is a transfer of risk - with employers no longer guaranteeing a set pension, employees must accept the consequences if investments underperform. But even worse - and employers rarely admit this - the risk transfer is just part of the deal. It's also likely staff will end up with smaller pension contributions.

n n n You've got to hand it to those fraudsters. In February, when Britain's banks and credit card lenders announced all customers would have to use chip-and-PIN technology, they promised us that while the cards might take some getting used to, this technology was foolproof protection against criminals.

Within three months, the petrol company Shell has had to stop accepting chip-and-PIN-authorised payments, after fraudsters broke into the system and stole £1m from its customers' accounts.

Apacs, the organisation that runs the UK's payments system, reckons the incident is a local difficulty for Shell, rather than a fundamental flaw in chip and PIN. But it hardly inspires confidence. Back to the drawing board, chaps.

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