New Morrisons Pension

snowqueen555

Can you please tell me why this is a bad scheme, is it solely because of the cap maximum 2.5% each year?

jamesd

It's a bad scheme because it guarantees that the people joining it will lose money on the invested money, and they can expect to lose more money the longer there is until retirement, with those a moderate or long way from retirement likely to lose more than the company contribution.

The lower of CPI or 2.5% is the problem. That means the best you can do is losing between 0.5 and 1% a year compared to RPI inflation and the worst is losing about 8% a year, assuming historic inflation rates are repeated.

Even the worst stakeholder pensions provide UK market tracker funds that have historically delivered around about 9% gain before RPI inflation, a bit over 5% after RPI inflation.

seven-day-weekend wrote: »

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

that's extremely unlikely to be so. This scheme is worse than every stakeholder pension I've ever seen, particularly for those at his relatively young age.

seven-day-weekend

Thanks for your advice. I'm not going to read any more because it's upsetting me that I have given him the wrong advice and I will lose sleep over it if I read any more. He's done it now and due to various problems he has, it means he needs a Pension that he can just stick his money in and not have to think about again. And on here we are always advised to join employer's schemes, that's why I instantly said 'join it' when he got the chance

Thanks anyway, I know you are trying to help. Let's hope he does not lose too much money

Linton

Assuming the only option is to either join the scheme as is, or make one's own arrangements without any benefit of the company contribution my views are:

The key question for which we would seem to have no answer is what happens to the pension pot if the employee leaves early. If the employee were to get the whole pot then it would be sensible to join the scheme. If the employee were not to get anything it would be disadvantageous. Somewhere in between - depends where in between.

The key advantage of the scheme is NOT that Morrisons contribution is high. It would seem to me that it actually isnt as high as it seems because Morrisons could gain some of their contribution back when investment returns are higher than inflation. Though of course any contribution is better than nothing.

The key advantage of the scheme is to do with risk. James and Hugh's reason for not recommending it is that one can get the 5-7% return on average required to better the Morrison scheme over 40 years from money invested in a Personal Pension or S&S ISA - a cash ISA wouldnt do the job. This may well be true if one knows about investing, is prepared to invest in shares/funds and can accept the ups and downs of the market. How many of Morrison's employees on £6.50/hour contributing £600/year would be happy or able to do this. Is a diversified fund retirement portfolio and its management viable with such a low contribution?

And of course would the employee be there for the 40+ years? If not we are back to the question of the pot and early leavers, and of course each year less adds to the advantage of the Morrison scheme from the point of view of the returns from investing.

The Morrison scheme has far less investment risk without putting unacceptable risk on the employer, which a standard Defined Benefit scheme would do, and requires no special skills and knowledge. The one risk which is worrying to me is the low cap on inflation.

In practice I fear that the real option is not one between accepting the Morrison scheme and managing ones own investment portfolio, but rather between accepting the scheme and making no provision whatsoever for ones retirement.

seven-day-weekend

Thanks Linton, that has really cheered me up.

My son has mild Aspergers Syndrome and although perfectly able in most things, and very intelligent, something like sorting out a Pension is beyond him, he will either not understand or just believe what someone tells him, so this Morrisons pension seems a good thing. He asked my advice and I advised him to join it. He has to have a pension he can just stick his money in and not have to think about again.

It IS a choice between having something like this or the little Stakeholder he had before, or nothing. I assumed because Morrisons were contributing then this would be best.

Thanks for re-assuring me somewhat.

hugheskevi

Can you please tell me why this is a bad scheme, is it solely because of the cap maximum 2.5% each year?

Yes - it is guaranteed future under-performance.

Thanks for your advice. I'm not going to read any more because it's upsetting me that I have given him the wrong advice and I will lose sleep over it if I read any more. He's done it now and due to various problems he has, it means he needs a Pension that he can just stick his money in and not have to think about again.

I wouldn't worry about it unduly - at low earnings the cash value of the differences isn't going to be very significant.

He also isn't extremely young so isn't amongst the worst affected, and as he gets older the scheme will get better for him. So hopefully he earns more in the future, he is older and the scheme will work better for him.

And on here we are always advised to join employer's schemes, that's why I instantly said 'join it' when he got the chance

This is the very first scheme I have seen in which I've concluded it is better to avoid being in it for a large group of people.

I understand jamesd's reasons for arguing to avoid NEST, and they are very legitimate reasons [which I was disappointed the NEST representative didn't respond to on another thread], although I am not sure I would say they are quite enough to convince me to avoid it altogether if it is a straight choice between NEST and nothing.

The key advantage of the scheme is to do with risk. James and Hugh's reason for not recommending it is that one can get the 5-7% return on average required to better the Morrison scheme over 40 years from money invested in a Personal Pension or S&S ISA - a cash ISA wouldnt do the job.

A cash ISA may actually come pretty close - at the moment you can get 4% fixed, and it has hovered between 4-5% over the last few years. Pre-2008 up to 7% was possible.

But admittedly even that is assuming you are constantly researching best rates, so involves action.

Is a diversified fund retirement portfolio and its management viable with such a low contribution?

A simple FTSE 100 tracker would easily do the job in almost all scenarios. If that is too volatile, go 50/50 FTSE 100 tracker, corporate bond tracker.

That is why I use 5% for most examples - it is far below historic values, as well as being below what you would expect with anything more than a cautious investment, so should be achievable by almost any investment you might choose to use as an alternative and doesn't demand investment knowledge or a big risk tolerance.

In practice I fear that the real option is not one between accepting the Morrison scheme and managing ones own investment portfolio, but rather between accepting the scheme and making no provision whatsoever for ones retirement.

Agreed

jamesd

seven-day-weekend wrote: »

on here we are always advised to join employer's schemes, that's why I instantly said 'join it' when he got the chance

Sadly you've been caught out by a new exception to that, joining NEST to be the only two I know of where I'd say it's better not to join at younger ages. This one is worse than NEST, which at least has a tracker fund instead of guaranteeing losing money.

It's better than a cash ISA and for his specific situation I think that it is also likely to be better than a S&S ISA because pensions are protected from benefits means tests and I assume that he is more likely than most to spend time living on such benefits.

So for his specific case I don't think you did too badly.

seven-day-weekend wrote: »

Let's hope he does not lose too much money

He can expect the investments to lose an average of 5-6% a year compared to a balanced managed fund that's normally used as the default fund in stakeholder pensions. It's pretty atrocious.

Assuming state pension age reaches 70 by the time he gets there, he might have 37 years in this scheme. Here are the expected results for the money from the first year compared to RPI inflation, compounding for 37 years, illustrating with £100 gross investment including tax relief and employer contribution):

This scheme: £68.94 (assuming only 1% below RPI, which is unlikely)
More realistic this scheme: £47.35 (assuming 2% below RPI)
Normal UK stock market: £608.14 (5% plus RPI)
Cash ISA: £36.13 (only 4% employee because no tax relief, no employer contribution, RPI+1%)
Personal pension: £190.04 (5% employee contribution, no employer contribution, RPI+5%)

The differences decrease as you get closer to retirement. With ten years to go it looks like this:

This scheme: £90.44
More realistic this scheme: £81.71
Normal UK stock market: £162.89
Cash ISA: £27.61
Personal pension: £50.90

With 20 years to go:

This scheme: £81.79
More realistic this scheme: £66.76
Normal UK stock market: £265.33
Cash ISA: £30.50
Personal pension: £82.92

All it takes to get a worse result than a cash ISA is being in the scheme long enough for the guaranteed investment losses to use all of the employer contribution and tax relief. But the employer contribution is large enough that usually that won't happen, because for every Pound of investment in this scheme including employer contribution and tax relief, you'd have only £0.25 to put into the cash ISA.

Linton wrote: »

Is a diversified fund retirement portfolio and its management viable with such a low contribution?

Of course. Now: Pensions has one and the default balanced managed funds used in stakeholder and other pensions are also hugely better than this, except just before buying an annuity.

Linton wrote: »

In practice I fear that the real option is not one between accepting the Morrison scheme and managing ones own investment portfolio, but rather between accepting the scheme and making no provision whatsoever for ones retirement.

Agreed about this risk but if the choice is that or this one I'd say put the money towards a home deposit or overpaying on a mortgage (not something I'm usually keen on, this is just such a bad deal that that looks attractive in comparison).

jamesd

So, if you're 20 or more years from expected retirement, it'll probably be better to use your money in a personal pension rather than joining this scheme.

It's a great shame that the employer spend on their part is mostly being wasted by the low investment returns.

If the firm is looking to discriminate against middle aged and younger employees by offering a scheme that is mainly attractive to those near to retirement, this should do the job.

Linton

I believe that both James and Hugheskevi have missed a key point:

The return on the pot is very low, but the company contribution is high. It will take many years for the difference in returns to outweigh the company contribution. Somewhere between 1 year and infinite years there will be a breakeven point.

Even taking Hugheskevis worst case of only 1 year contribution and James high return of 9% this works out to be nearly 20 years on 2% inflation. And clearly if one stayed 20 years half of ones contribution outside the Morrison scheme would have the benefit of the much higher returns for 10 years or less.

So the key factor is for how long one is a member of the scheme. This is particularly important for young early leavers, as for older people joining say 20 years before retirement and staying the course the scheme does seem very beneficial.

Early Leavers

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The OPs case is of presumably unskilled people working at little more than minimum wage. How many of them will be expected to stay with the company on the same rates for 20+ years? Or even 10 years?

If early leavers were to get their complete pot for investment elsewhere then surely joining the scheme would be a no brainer as the extra Morrison contribution would greatly outweigh a loss of return. Conversely if they only got a return of their own contributions then it would be a no brainer to make one's own provision. Again somewhere between the two extremes is a breakeven point.

Unfortunately I dont know, and I believe that neither of the other two contributors know, what would happen if someone left after say 5 years. So to make forceful recommendations one way or the other is at this stage premature at best and dangerous at the worst.

If we add into the discussion the suspicion that many people not joining the scheme wont set up a high return investment plan but would instead use the extra money for current expenditure, then the danger becomes more acute.

jamesd

Linton wrote: »

I believe that both James and Hugheskevi have missed a key point The return on the pot is very low, but the company contribution is high.

We haven't missed that point.

Linton wrote: »

It will take many years for the difference in returns to outweigh the company contribution. Somewhere between 1 year and infinite years there will be a breakeven point.

It's about twenty years comparing this to a personal pension with no employer contribution.

Linton wrote: »

So the key factor is for how long one is a member of the scheme.

It's how long until retirement, not how long you're a member of the scheme. How long until retirement translates to how old you are. And that makes it a scheme that is blatantly discriminating based on employee age.

Linton wrote: »

This is particularly important for young early leavers, as for older people joining say 20 years before retirement and staying the course the scheme does seem very beneficial.

The expected value of £100 paid into this scheme ten years before retirement is £81.71. If it had a balanced managed fund available instead then the expected value would be more like £162.89. That's not "very beneficial", it's atrocious investment return, compensated for only because the employer is wasting a lot fo employer contribution to reduce the effect of the losses.

Linton wrote: »

The OPs case is of presumably unskilled people working at little more than minimum wage. How many of them will be expected to stay with the company on the same rates for 20+ years? Or even 10 years?

Not many, I hope. They should be seeking employment tribunal compensation for age discrimination and leaving for a better employer.

Linton wrote: »

If early leavers were to get their complete pot for investment elsewhere then surely joining the scheme would be a no brainer as the extra Morrison contribution would greatly outweigh a loss of return.

If it was a defined contribution scheme, I agree. But it seems to be defined benefit, so it'll cost thousands of Pounds to get the money out.