ANALYSIS
Most people working in the private sector see their pensions take a hit when stock markets fall – but many public sector workers are shielded from this disruption
If you have been brave enough to check your pension balance since Donald Trump’s infamous Rose Garden press conference last Wednesday, it is likely to have been an uncomfortable read.
Since the US President launched his wide-ranging plan to hit imports to the State with – in some cases eye-watering – tariffs, stock markets around the world have seen shares plummet.
With that, much of the money that UK pension savers have put away in equities will have fallen, reducing the value of their retirement savings, in some cases by thousands or even tens of thousands of pounds.
If you are decades away from stopping work, then the drop will hopefully – touch wood – be relatively inconsequential in the grand scheme of things. As with Covid and other stock market plunges before it, savers will hope this is a temporary dip, forgotten about in 10 years’ time.
However, if you are close to retirement, it is very possible the fall could put on ice your plans to leave work, while you wait for the situation to settle.
But while most of us who have defined contribution (DC) pensions rely on stock markets performing well to grow our pots and ensure we have the money to enjoy the retirements we want, some lucky workers need not worry.
Those with defined benefit (DB) pensions – that guarantee a set inflation-protected income for life in retirement – are shielded from the turmoil we are currently seeing. They can sleep relatively easy.
Once common across a variety of workplaces, employers in the private sector moved away from such pensions in the second half of the 20th century, preferring instead to place the risk on saving for retirement on the shoulders of workers, rather than carry the burden themselves.
Only in the public sector are DB pensions now common.
The likes of civil servants pay into their pensions each month to get a guaranteed income in their later years.
Those sorts of pensions are generous compared to those received in the private sector anyway, but in times like these when economic uncertainty can cast a worrying shadow over people’s retirements, the two-tier system in the UK pension system becomes more apparent.
That’s not to begrudge our public-sector workers the pensions they have been promised.
Their unions have fought hard to maintain the conditions they enjoy, and could equally argue that their status in the jobs market faces multiple disadvantages compared to their private-sector peers.
Throughout the past decade-and-a-half, private sector pay has risen at a faster pace than the public sector, and even now, the likes of teachers and doctors don’t have the opportunity to barter in an open jobs market to improve their own salaries in the way a private-sector worker can.
But this discrepancy in the way our pensions work should serve as a reminder – and warning – about how precarious most people’s retirement pots are.
In recent months, there have been hints from the Chancellor Rachel Reeves that she wants to use pension investments as a way to boost UK growth.
The details of the idea, dubbed as “pension fund nationalism” by some commentators, are relatively unclear, but the premise is that money in pension pots could be used to invest in productive assets, which could boost infrastructure investment in the UK.
Caution over this has been called for by several pension experts, with AJ Bell’s Tom Selby warning that “conflating” a government goal of driving investment in the UK and people’s retirement outcomes “brings a danger because the risks are all taken with pensioners’ money”.
The current situation brings that warning into light in an even starker way.
Although what we are witnessing at the moment is a global sell-off – with UK stocks not performing particularly badly – what it does make clear is that most UK pension savers’ money is always at risk.
Extra jeopardy should not be introduced to fulfil the aims of our politicians, when it is those working in the private sector that will shoulder the risk.
Should the idea of using pension investments to boost growth fail, it will be workers who find themselves with less money in retirement.
Any risk should be decided by workers themselves and the people managing their money.
Ultimately, the primary aim should be what provides them with the largest possible income in retirement.
