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People 'Unaware' of Pension Risks

BBC News

October 11, 2008


United Kingdom

Millions of people are being encouraged to take too much risk with their pensions, the government-funded Pensions Advisory Service has warned. 

It said workers who pay into pension schemes which invest heavily in shares may not be aware of the risks. 

But the National Association of Pension Funds says such schemes based on share prices do not have to be risky. 

The warning comes in a week that has seen world stock markets tumble amid rising fears of a global recession. 

About five million people in the UK are in so-called "defined contribution" pensions provided by their employer. 

They are different from a final salary scheme, which guarantees a pension based on end of career earnings and length of service. 

With a defined contribution pension, the amount depends on how well or how badly investments have performed. 

'Personally inappropriate' 

Pensions can be invested in a mixture of shares, property, cash and bonds but more than 90% of people opt for the default fund, where between 75% - 100% of their investment is in shares. 

Malcolm McLean, from the Pensions Advisory Service (TPAS), an independent voluntary organisation grant-aided by the Department for Work and Pensions, believes they could be taking on more risk than they realise. 

He said: "My concern is people think the default fund has been recommended to them and that it's appropriate for them personally, which it may not be, because it may be 100% invested in shares." 

However, the National Association of Pension Funds says default funds do not have to be risky because they automatically move scheme members' money away from shares to safer investments as they approach retirement. 

Official figures show that in 2007, 8.8 million people paid into employer pension schemes of all types last year, down from 9.2 million in 2006.

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