01 October 2008
Thousand of savers stuck in Phoenix & London Assurance's
'zombie' with-profits funds have been thrown a lifeline which could
dramatically boost their chances of building a decent pension.
Pearl, which now runs the £6 billion funds, is writing to
50,000 savers outlining radical plans designed to boost their
retirement income. Most took out pensions with the firm -
previously Sun Alliance and London Assurance - between 1980 and
1994. The proposed changes would strip away expensive benefits
called 'guaranteed annuity rates' and in return, savers would
receive a one-off increase to their fund and would have the
opportunity for better long-term growth.
Pearl suggests it could increase some pensions by up to a third.
Guaranteed annuity rates promise savers a specific level of
retirement income on the money they have saved in their
pension.
Annuity rates have almost halved since 1990, so these guarantees
are hugely valuable - and hugely expensive for the pension firm.
Most who took out Phoenix policies in the Eighties and Nineties
with these guarantees attached will have better rates than they can
find elsewhere.
But there is a price to pay for these guarantees. The fund has
to be certain it can meet them, so it has to adopt a very
conservative approach to investment. In this case, many savers'
pensions are exclusively or predominantly in bonds, which are more
predictable than shares.
The downside is that this has stunted the growth of thousands of
savers' pensions. Annual bonuses have all but dried up. Pearl has
also had to set aside a vast amount of money to ensure it can
provide pensions at guaranteed rates - again reducing the value of
savers' pensions.
By getting rid of the guaranteed annuity rates, Pearl says it can
give this money back to savers - almost doubling their pension pots
immediately.
With the guarantees gone, it says it could split the fund between
shares (45 per cent), bonds (30 per cent) and commercial property
(25 per cent).
Pearl says this could boost the investment returns on pensions
by a third, using conservative forecasts of investment growth. An
example used in the information given to policyholders is of a man
who took out a pension with Phoenix in 1992 and is set to retire in
2023.
If the changes go through, his £10,191 pension pot would
increase immediately to £20,299. If the stockmarket then
rises at around 7 per cent annually, the fund would grow to
£57,000 instead of £29,030.
This would buy an annual pension of £2,460 - almost a
third higher than the £1,910 the same saver would get if
things stay as they are.
Mike Kipling, of Phoenix, says: 'Our calculations show that these
changes can be expected to improve the future retirement benefits
of our customers. We've set out the benefits and risks to customers
in the pack they will receive in as clear and straightforward a way
as we can.'
But there is a risk that some savers could lose out if the stock
markets perform more poorly than expected or annuity rates drop
significantly.
To provide extra security, Pearl proposes guarantees which ensure
that most savers' retirement funds won't be any lower than they are
now.
It is also restricting these changes to those who are ten years
or more from retirement and who have time to ride out any downturns
in the stock market.
Tom McPhail from financial adviser Hargreaves Lansdown says: 'In
principle these changes are a good idea, but they do involve a leap
of faith for investors. It is very difficult to make an informed
choice between a 100 per cent boost to your fund value and
complicated actuarial calculations based on future investment
returns.'
For the plan to proceed, half those replying must vote in favour
and they must control 75 per cent of the money of those who
vote.
More detailed proposals will then be taken to the High Court,
where there will be a policyholder vote. If the changes get the
thumbs-up, Pearl hopes to implement them on 1 January, 2010.
