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The merits and demerits of pension scheme types
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DescriptionThe merits and demerits of pension scheme types
In Norma Cohen’s article: “DC pension schemes no better than cash savings account, claims
study” we can read about influence which makes poor market stock to the pensions schemes.
The writer said that it would be better for members of defined contribution pension schemes
to live their money in the savings accounts rather than put them in a pension schemes. Why is
Stock markets around the world have been falling sharply on fears of a credit crunch that
could affect the financial sector. In addition, many pension funds own shares which make up
part of their portfolio used to pay people's occupational pensions. If shares fall, they may have
less money to pay future pensions, and employee contributions may have to rise. In addition
there is a lot of people which pension is dependent on their salary and years of service. If, for
example, their company collapses, they could find that they do not receive as big a pension as
they were expecting. We also have to accept the risk that the stock market might fall further,
thus leaving us with an even smaller pension pot.193
To understand Norma’s Cohen point the best thing is to look at some examples. The first one
is going to be a 60 year old with an existing private personal pension still in employment.
Private personal pension is the one, where pensioner pays a regular amount, usually every
month, or a lump sum to the pension provider who will invest it on their behalf. The fund is
usually run by financial organizations such as building societies, banks, insurance companies
or unit trusts.
Personal pension is a an example of defined contribution scheme so it depends on the amount
paid in, how much the invested pension fund increases in value, how much is taken out of it in
charges and how much pension the fund can buy at retirement.
That kind of pension involves a shift in risk as it depends upon investment returns and other
factors like: investment returns, inflation, longevity.
The 60 years old pension person had to think about all those factors before he started the
personal pension. So if he thought that his investments will perform good and that the rate of
inflation will be smaller and that he will live until certain age and he actually assumed it
wrong his pension will be smaller than planned. As the fact of very poor stock market was a
huge surprise for a lot of people it is possible that this person did not put enough money to his
private pension scheme. What means that it can be a problem for him when he stops working
to live just on the money from his pension.
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