The greatest impact of the credit crunch on pensions has been the reduction in investment values.

Most clients with money-purchase (defined-contribution) pensions will find the value of their pension funds lower than before. The FTSE 100, a measure of the price of leading UK shares, has fallen 33% in the last year. Overseas investments have been even worse for sterling investors, the US Dow Jones falling over 50% allowing for currency changes. The price of fixed interest stock has done better, 10-year gilts rising by 9%, though with a reducing income yield.

In general, most of the falls happened in the first 10 months of 2008 and any money purchase valuations in that period may need to be revalued.

Those clients with money-purchase pensions that are invested in with-profits funds may have see the current value of their pensions reduced by temporary surrender penalties. These Market Value Adjustments (MVAs) as they are called may or may not apply in any particular case depending on a number of factors, such as who the pension provider is, when the plan commenced and how near the client is to their planned retirement date.

Money-purchase pension holders should also plan for lower pensions in retirement due to the fall in assets values and lower-interest rates increasing the cost of buying the pension annuity on retirement.

For final-salary pensions the future pension amount is already set and is unaffected by investment falls. Indeed the flip to the money-purchase case is that the underlying fund now needs to be bigger to pay for the same pension in retirement, and so CETVs have increased due to current market conditions. For example, some state CETVs have increased by up to 12% in the last 6 months due to interest rate changes.

Of course, this is only the case if the pension scheme can afford to pay it. This might mean reducing benefits, which can be allowed for in full actuarial reports, or failing altogether. If a scheme fails, one of two statutory safeguards might kick in.

In the rare case that an insurer fails, its plans or pension annuities are covered by the Financial Services Compensation Scheme (FCSC) for the whole of the first £2,000 and 90% thereafter.

Meanwhile private company pension schemes are covered by the Policyholder Protection Fund (PPF). The PPF guarantees all pensions currently in payment, and 90% of other pensions, up to a limit (currently £28,742pa). If a company becomes insolvent, the trustees of its pension scheme can apply to the PPF for protection. Initially the scheme is put into an Assessment Period, while the PPF see if the scheme / employer can be rescued, or if the scheme has sufficient assets to guarantee at least PPF limited benefits. The Assessment Period is likely to last at least a year, and during this time, trustees have to reduce benefits to the PPF limits. If at the end of the review, the PPF accepts the scheme it transfers to them.

A scheme in the Assessment Period cannot generally pay transfers out of the scheme. However, an exception can be made for the pension credit from a pension sharing order. Once a scheme is transferred to the PPF no further pension sharing or attachment orders can be made, though orders made during the Assessment Period, but not implemented will be honoured. Statements of compensation, equivalent to CETVs, can be obtained for members in transferred scheme from the PPF.

We have a checklist that can help in deciding what actions to take due to credit-crunch issues. If you would like a copy of this pdf please complete the request form.