New Morrisons Pension

baileythepuppy

Hi everyone, i work at morrisons and they have set up a new pension scheme and it can be looked at online with a calculator to get an estamate of what the total will be when you retire. as this morrisons pension has replaced the existing one to give everyone a more guarnteed pension pot at the end after so many people loosing money in the recession.

if you could give me some advice by enterting my details to get the info for me to appear in the online calculator.

i am male, date of birth 20/12/1988, hourly rate £6:50, 39 hours per week.

www. mymorrisonsretirementsaver co.uk
(i cannot post link properly because i am a new member)

then you click on 'retirement calculator'

please help, i am wanting to start saving for my future - is this a better option than a ISA saving myself. and what is meant by buying annuinty and would the 20% tax that you get on a pension get took off what is shown on the calculator? and if i die does it go to your partner?

sorry for so many questions but i do not feel comfortable going to see a financial advisor incase they advise me wrong to get profit/sales for themselves.

thanks in advance for your help everyone

Linton

baileythepuppy wrote: »

Hi everyone, i work at morrisons and they have set up a new pension scheme and it can be looked at online with a calculator to get an estamate of what the total will be when you retire. as this morrisons pension has replaced the existing one to give everyone a more guarnteed pension pot at the end after so many people loosing money in the recession.

if you could give me some advice by enterting my details to get the info for me to appear in the online calculator.

i am male, date of birth 20/12/1988, hourly rate £6:50, 39 hours per week.

www. mymorrisonsretirementsaver co.uk
(i cannot post link properly because i am a new member)

then you click on 'retirement calculator'

please help, i am wanting to start saving for my future - is this a better option than a ISA saving myself. and what is meant by buying annuinty and would the 20% tax that you get on a pension get took off what is shown on the calculator? and if i die does it go to your partner?

sorry for so many questions but i do not feel comfortable going to see a financial advisor incase they advise me wrong to get profit/sales for themselves.

thanks in advance for your help everyone

OK I have done some calculations. These may be wrong, but hopefully someone else will confirm or disagree.

Assume current prices.

1) Morrison scheme

You get a pot at 65 of £133000.

2) You dont join Morrison scheme so dont get Morrison's contribution, but invest your contribution in an ISA:

To get a pot at 65 of £133K you would need an annual return above inflation of about 7% (trying to include the tax complications doesnt make much difference to the figure). This is in my view very unlikely to be achieved unless you are a very skilled and/or lucky investor in shares.


BUT

You will note that the end result is a £33K lump sum and a pension in current prices of about £2700 which is nice to have but less than 50% of the current state pension giving a total of perhaps 2/3 of your current pay. If you were wanting something better you will need to save in ISAs as well as paying the pension. I appreciate this could be difficult on your current income.

On your other questions....

1) Buying an annuity means converting the final pot (or that which remains after taking a 25% tax free lump sum) into a guaranteed monthly payment, in the Morrison example increasing annually with inflation, for the rest of your life.

2) Annuity income is taxed in the same way as your pay, but the 25% lump sum is tax free.

3) You will be able to nominate a person to receive your pension pot if you die before taking the annuity. The trustees are not compelled to respect your wishes but it would be extremely unusual if they didnt. When you buy an annuity you can determine a % of your income to go to your surviving spouse when you die. This is often 50% but could be anything up to 100%. More going to your surviving spouse means a bit less in your annuity.

hugheskevi

[STRIKE]Agree that staying in Morrison's scheme is better choice than opting out and using the money for something else (either ISA or personal pension).[/STRIKE]

After reading jamesd's post below, I considered this in more detail, and changed my initial answer above, which was based on a simple comparison of being in scheme whole career vs not being in scheme at all.

From some calcs, I make it you'd be better off not being in the scheme and putting the 5% into a SSISA or personal pension - that applies up to at least age 35 after which the scheme becomes more competitive and worthwhile considering opting in sometime after that age, although it is sensitive to assumptions and age 35 is based on very optimistic inflation assumptions so is very much a minimum age threshold at which to consider.

Original answer from here on.

But worth being aware that the annual increase is at most 2.5% (it is the lower of CPI and 2.5%).

The decent initial contribution rate (16% of pensionable pay, of which 5% comes from member) makes up for this very low rate of 'guaranteed' return, but a spell of high inflation - especially late in career when the pot is a decent size - would be extremely damaging to the pension.

Whilst inflation is always a risk to any investment, you would usually see high inflation at least partially reflected in the return from investments such as equities, so to an extent you are hedged against inflation depending on what you are invested in. If you were unfortunate enough to have high inflation such as experienced in the 1970s/1980s in the years leading up to retirement in this scheme, the real value of a pot could be savaged.

jamesd

baileythepuppy wrote: »

i am male, date of birth 20/12/1988

You appear to be one of the many of employees for whom this plan appears to be a very bad deal. The key question you should ask them is "can I transfer the money out of this scheme into a different scheme?" If the answer to that question is no then you should think very hard before becoming a member of a scheme with such appallingly low investment returns, guaranteed to be about 1% below RPI even in good years, when even just sticking to the main UK stock market has historically produced gains of RPI plus a bit over 5%.

If you were close to retirement the scheme would be a very good idea.

As it is, the scheme badly short-changes the younger portion of the workforce and is a good example of poor pension scheme design.

You may also consider discussing the scheme with your union and bringing an age discrimination claim against the company because this scheme clearly and very badly discriminates against younger employees, in favour of older ones.

It's also worth asking your union to check whether the scheme meets the requirements for auto-enrollment schemes and insisting on one which does if this one doesn't.

The employees pay in 5% and the employer tops that up to 16%. That's quite a decent combination, a more typical scheme would be topping up to 10-12%. The real killer is that the investment then grows only at CPI. That's way less than normal investments. For someone close to retirement this doesn't matter because they won't be losing out on many years of higher compound growth. For someone who is relatively young the lost compounded growth will hugely penalise them.

The previous stakeholder scheme looks like a much better deal for younger employees.

Given this terrible scheme and your age I suggest that you consider using ISA investing instead, particularly if you don't yet own your own home.

If you have colleagues who are within about ten to twenty years of retiring you can tell them that this is likely to be a good deal for them compared to a personal pension with no employer comntribution.

If anyone wants to calculate the gains for this scheme compared to others you should be using about -2.5% as the investment return for this scheme and 5% or so for alternatives. Those are based on historic RPI inflation and historic UK real investment returns. Historic UK inflation is around 4% but -2.5% is a better approximation than -1.5% because this scheme uses the lower of 2.5% and CPI. Also because this is using the lower CPI value rather than RPI.

Linton

jamesd wrote: »

You appear to be one of the many of employees for whom this plan appears to be a very bad deal. The key question you should ask them is "can I transfer the money out of this scheme into a different scheme?" If the answer to that question is no then you should think very hard before becoming a member of a scheme with such appallingly low investment returns, guaranteed to be about 1% below RPI even in good years, when even just sticking to the main UK stock market has historically produced gains of RPI plus a bit over 5%.

If you were close to retirement the scheme would be a very good idea.

As it is, the scheme badly short-changes the younger portion of the workforce and is a good example of poor pension scheme design.

You may also consider discussing the scheme with your union and bringing an age discrimination claim against the company because this scheme clearly and very badly discriminates against younger employees, in favour of older ones.

It's also worth asking your union to check whether the scheme meets the requirements for auto-enrollment schemes and insisting on one which does if this one doesn't.

The employees pay in 5% and the employer tops that up to 16%. That's quite a decent combination, a more typical scheme would be topping up to 10-12%. The real killer is that the investment then grows only at CPI. That's way less than normal investments. For someone close to retirement this doesn't matter because they won't be losing out on many years of higher compound growth. For someone who is relatively young the lost compounded growth will hugely penalise them.

The previous stakeholder scheme looks like a much better deal for younger employees.

Given this terrible scheme and your age I suggest that you consider using ISA investing instead, particularly if you don't yet own your own home.

If you have colleagues who are within about five to possibly as many as ten years of retiring you can tell them that this is likely to be a good deal for them.

If anyone wants to calculate the gains for this scheme compared to others you should be using about -2.5% as the investment return for this scheme and 5% or so for alternatives. Those are based on historic RPI inflation and historic UK real investment returns. Historic UK inflation is around 4% but -2.5% is a better approximation than -1.5% because this scheme uses the lower of 2.5% and CPI. Also because this is using the lower CPI value rather than RPI.

Have you calculated the numbers? I think your assessment is incorrect in that you are taking the Morrison's top-up as a given fixed cost to Morrisons. If it was, you would be right. However as I see things, Morrisons is transferring investment and inflation risk from the employee to itself. It is doing this by paying (nominally) more than it would have done had the scheme been based on normal fund investments. It is effectively a guaranteed return scheme. If you look at the Morrisons website it implies that the 16% contribution is not "actual" necessarily and I would guess under normal circumstances it isnt. The actual cost to Morrisons will vary depending on the difference between return from its own investments and inflation. Put another way, the 16% isnt exceptionally generous, rather it is average but is uprated as part of the risk transfer.

So from my numbers the "extra" Morrison contribution whilst in payment more than makes up for the better returns that could come from a pure equity investment on a zero employer contribution. I would agree that if employment ceases in the early years then it would be sensible to transfer the pension elsewhere.

PS - say the OP left Morrisons after 5 years work. The pot size would pretty obviously be much higher within the scheme than if it was invested with no employer contribution.

hugheskevi

PS - say the OP left Morrisons after 5 years work. The pot size would pretty obviously be much higher within the scheme than if it was invested with no employer contribution.

It would be, but the Morrison's scheme is a Defined Benefit scheme.

Therefore, the transfer value would not be the reported pot size, but the Cash Equivalent Transfer Value of the benefits accrued to date.

Given the assumed rate of return in calculating a CETV will be higher than CPI capped at 2.5%, the actual transfer value offered based on a CETV calculation will be lower than the reported pot size.

Linton

hugheskevi wrote: »

It would be, but the Morrison's scheme is a Defined Benefit scheme.

Therefore, the transfer value would not be the reported pot size, but the Cash Equivalent Transfer Value of the benefits accrued to date.

Given the assumed rate of return in calculating a CETV will be higher than CPI capped at 2.5%, the actual transfer value offered based on a CETV calculation will be lower than the reported pot size.

Its NOT a defined benefit scheme - the pot is used on retirement to purchase a pension at the then current market rates. To quote from the website:
"You will use your saving in the Retirement Saver to buy an annuity at age 65 (the Retirement Saver's normal retirement age). "
"The cost of buying any annuity is based on standard annuity rates at April 2012(This is just the assumption for the calculator). We have also assumed an annuity charge at retirement of £160. This amount would only be deducted from your benefits if you chose to use the Plan administrators' service for selecting an annuity at your retirement."

hugheskevi

See article here:

(if you get a subscription wall, google "morrisons DB scheme" and click on first link).

In particular:

However, as the scheme technically qualifies as a DB scheme

All cash balance schemes are DB, as anything that isn't pure DC with member bearing all the risks is DB, whether or not annuities are purchased.

Linton

hugheskevi wrote: »

See article here:

(if you get a subscription wall, google "morrisons DB scheme" and click on first link).

In particular:



All cash balance schemes are DB, as anything that isn't pure DC with member bearing all the risks is DB, whether or not annuities are purchased.

On the other hand quoting the Pension Advisory Service:

"A cash balance plan is an occupational pension scheme which works in a similar way to a defined contribution scheme. They are sometimes called 'hybrid' schemes because they combine aspects of defined contribution and defined benefit schemes."



Its not a DB ("Final Salary") scheme as most people have experienced it. In a standard DB scheme there is no individual pot whereas here there would seem to be - something of major significance.


I cant find any info anywhere about what happens to early leavers on the Morrison scheme. This is definitely something that needs to be clearly spelled out.


At first sight this scheme does seem to have much to recommend it in principle as it removes much of the risk from the employee without imposing massive risks on the employer. Investment and inflation risks I believe are a major discouragement to many people contributing to a pension.


However determining the precise value of the scheme does need some detailed calculations.

kidmugsy

The intellectual level of the scrutiny of this scheme by you chaps is much higher than in the anodyne article in this morning's Telegraph. Journalists, eh?

hugheskevi

The OP is 23 years of age, earning around £13,000 per year.

In the Morrison's scheme, that means £2,080 is added to the pot (16% of pensionable earnings.) in year 1. That will increase in line with CPI capped at 2.5% until age 65.

Assume CPI is 2% in all years. That £2,080 will grow to a pot of £4,778 at age 65.

Alternatively, the OP could put their 5% employee contribution into a personal pension instead (to make comparison straightforward - they could also use SSISA if appropriate, etc). That would be £650 going in. If that increases at 5% each year it will be a pot of £5,297 at age 65.

The assumption that the 2.5% cap on CPI never bites is very generous to the Morrisons scheme, and a 5% rate of return (or in this case, CPI+3%) is very conservative. Despite that, the Morrison's scheme loses in the comparison. I'd argue that using those assumptions, the probability of high inflation hurting the Morrison pot is much higher than the risk of poor investment returns hurting a personal pension (as with a 5% return you don't need to take much risk at all).

Over time, the balance shifts toward the Morrisons' scheme as the OP gets older, but not for a long time yet.