Consultant warns on equity risk in UK pension plan

Companies and staff may have to pay more money into a proposed British national saving scheme to enjoy a level of benefits lawmakers expect because of the risks of equity market setbacks, a pension consultant said.

Proposals to create a National Pension Savings Scheme (NPSS) have not so far focused enough on the risks of investing in different assets such as equities, John Ralfe, independent consultant, said in a note for RBC Capital Markets.

"The case has not been made that a funded pension system can deliver more than the real growth rate of the pay-as-you-go (state) system, with the working generation taxed to pay for the pensions of the retired generation," he said.

The government supports automatically enrolling staff in the NPSS if they are not already in a pension plans, and the system would take contributions from staff and firms equal to eight per cent of pay. This money would be invested in various funds.

In a policy document by the Department for Work and Pensions (DWP) in May, it said "the risk that investments do not do as well as expected lies with the saver", although the chance of a loss can be mitigated by moving into lower-risk assets as a person nears the age of retirement, the DWP said.

A person earning a median income of £440 a week is projected by the government to receive £80 a week in a NPSS payment, but when equity market risks are accounted for, contributions should rise to 14 per cent from eight per cent to generate the same benefit, Mr Ralfe said.

Mr Ralfe is a former head of corporate finance at UK retailer Boots and provoked widespread comment earlier in the decade when he shifted the company's entire final-salary pension fund portfolio into investment-grade bonds.