Outlook: Pensions

FOR PEOPLE who have been saving for their pension with Norwich Union, yesterday's confirmation that it is setting aside pounds 750m to pay for annuity guarantees must have a satisfying ring about it. For most pension savers, this year is possibly the worst year to retire in decades. The reason is that annuity rates - which determine the rate of retirement income yielded by their pension savings - have hit their lowest level since the sixties. Five years ago, a pounds 100,000 pension fund could buy a retirement income of over pounds 13,000 a year; now it is closer to pounds 8,000 a year.

Norwich Union savers who bought policies in the seventies and eighties have been insulated from the problem. Their policies typically guaranteed an annual retirement income well into double figures. As Norwich Union guaranteed these rates, it must now pay them regardless of how low they have sunk.

In a sense, such savers are doubly fortunate. Their pension funds are already swollen by the lengthy bull-run on the stock market since the early 1970s. So even if annuity rates have fallen, the impact on retirement incomes is offset by the greater capital value of their pension savings. In other words, those with guarantees are getting the upside of the bull- run without the downside of falling yields. Unfortunately, other policyholders - those without the guarantees - are paying for that double benefit. The pounds 750m provision to pay for the guarantees is coming out of Norwich Union's long-term fund, 90 per cent owned by policyholders.