New Morrisons Pension

Linton

hugheskevi wrote: »

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.

I dont understand where your numbers come from.

I have set up a spreadsheet showing the numbers up to an age of 65 for the two options. According to my calculations on your assumptions, at 65 the OP would have a Morrisons scheme pot of just over £200K whereas the 5% return with no employer contribution a PP pot would be about £125K. To make them equal you would need an average investment return of about 7% (5% above inflation).

It seems to me the balance is actually better for the younger employee as in the early years the Morrison contribution is much larger than income from the difference in returns.

A 2.5% cap is significant though in the Morrisons description they do say that this figure may vary. So its rather difficult to assess what the actual impact would be.
Addition: (sorry, reread the Assumptions - it does suggest the index may be changed rather han the cap, but then I guess if average inflation rose to very high figures Morrisons would find it difficult to keep to a low cap.)

kidmugsy

Consider any pension scheme that's particularly vulnerable to inflation: is there any economic way that the man in the street can protect himself by making a bet on future inflation rates?

Linton

kidmugsy wrote: »

Consider any pension scheme that's particularly vulnerable to inflation: is there any economic way that the man in the street can protect himself by making a bet on future inflation rates?

Not quite a bet, more an investment strategy...

Index linked bonds - but then the M in the S would lose out if inflation was low.

Another option would be the riskier but potentially more lucrative one of investing in companies like major retailers. In general their income, costs, and so their profits and hopefully their share price and dividends will broadly increase with inflation apart from any other investment gains.

jamesd

Linton wrote: »

To make them equal you would need an average investment return of about 7% (5% above inflation).

Have a look at the Equity Gilt Study. Long run RPI inflation wasn't 2%, it was more like 4%. And UK equity returns were a bit over 5% plus RPI inflation.

To calculate the value of this pension you need to give it a negative real return because both its inflation measure and the cap at 1.5% below long term inflation mean that it won't keep up with RPI inflation. Since it uses CPI another 0.5-1% lower to allow for that and the variation seems reasonable.

Linton wrote: »

It seems to me the balance is actually better for the younger employee as in the early years the Morrison contribution is much larger than income from the difference in returns.

But that's only relevant if the younger employees can get the money out to invest it and get decent investment returns. If they can then it's a good deal for them as well as for those near to retirement.

The ability to transfer out is the critical factor for younger employees in this scheme.

Without that it looks like blatant age discrimination.

hugheskevi

I dont understand where your numbers come from.

A simple 1-year comparison of 'should I join the Morrison scheme' vs 'should I instead put my employee contribution into a personal pension instead?'

I think you have interpreted it as being a career of contributions.

I have set up a spreadsheet showing the numbers up to an age of 65 for the two options.

Why all-or-nothing?

The Morrison scheme is better the older you are, so comparisons that incorporate contributions at older ages will look better.

But there isn't any reason you cannot join the scheme at those older ages, and direct contributions at younger ages when the scheme isn't good at other investments - hence why the one year Morrisons vs personal pension decision is relevant rather than looking at it is as one-off decision to either be in-for-life or out-for life.

If the choice were simply that you either join the scheme forever or forever stay out and you have to make that choice now and stick with it forever, I'd agree that the Morrison's scheme would at least be worthy of consideration but even then it is far from clear-cut.

mark55man

That's the touble with pensions there is no such thing as a simple question as over 40 years so many lifestyle and economic things can change.

I have to say I am not sure if we have helped the OP who is probably shellshocked - but that's pensions for you. Have we reached agreement here as to whether its good or bad for OP
* assuming OP stays at Morrison
* assumin OP doesn't?

hugheskevi

I have to say I am not sure if we have helped the OP who is probably shellshocked - but that's pensions for you. Have we reached agreement here as to whether its good or bad for OP
* assuming OP stays at Morrison
* assumin OP doesn't?

My vote in either scenario goes to don't join Morrison's scheme at the moment, and review that decision at age 35 (and I do mean review - I'd expect it may still be the right decision not to join at that age).

jamesd

For employees who are young and who will leave after a few years it's clearly best not to join the scheme. Because this seems to be a defined benefit pension scheme the advice of an IFA with pensions qualification will be mandatory to transfer out. That will be so expensive - many thousands of Pounds, perhaps as much as £10,000 - that it will not be economic to transfer out. That means that the money will be effectively locked up and losing value for decades.

For someone who stays at Morrisons it's again a bad idea to join at a young age because of the guaranteed poor investment returns. Joining up to a many as ten to twenty years before retirement might not be a bad idea for those who want to buy an annuity. That depends on whether they have access to the full annuity market, in particular if they have anything that affects life expectancy whether they will have access to enhanced annuities that can pay out a lot more than standard ones and which are available to around 30-40% of purchasers.

All they would have needed to achieve their claimed objective was to have a stakeholder scheme that included an index-linked investment option as one of its choices.

seven-day-weekend

My son has just joined this scheme. He is nearly 33.

I advised him to join it as it is better than the Stakeholder scheme he was in previously, and the Morrisons contribution is good.

He does not earn much as at the moment he has a 24-hour contract, but hopefully things might improve in that area in the future. In any case, it is a painless way for him to get a Pension, which is what he needs.

In his case we are very pleased he can join this scheme.

hugheskevi

I advised him to join it as it is better than the Stakeholder scheme he was in previously, and the Morrisons contribution is good.

What would you say the Morrison's contribution is?

Assuming a person aged 33, earning £13,000 per year, and CPI at 2%, the first year 'contribution' (16% of pensionable earnings, employee plus employer) would be £2,080. By age 65 that would increase to £3,920 (increasing at 2% per year).

The employee contribution is 5% of pensionable earnings. That is £650 for the first year based on £13,000 pensionable earnings. Assume a 5% annual rate of return from conservative investments. By age 65 that £650 will have grown to £3,100.

Using the assumptions in the paragraph above, a contribution of £823 in the first year would be needed to generate a pot of £3,920 at age 65 (at 5% growth).

So in the first year the employee contribution is 5% (£650), and the employer contribution is £173 (1.3%).

It may well be that a rate of return greater than 5% can be achieved, or that CPI inflation above 2.5% erodes the value of the pension, which in either case would reduce the employer contribution - quite possibly to the extent it is actually negative.