Citywire for Financial Professionals
Stay connected:

View the article online at

Are crumbling pensions taking equities down with them?

The closure of defined benefit pension schemes could have unexpected consequences for share investors.

Are crumbling pensions taking equities down with them?

In a blog, and drawing on work from Mckinsey, the Henderson investment team make a thought-provoking observation:

‘Last week Shell, the oil major, announced it was to close its final salary pension scheme to new members – the last FTSE 100 company to offer this type of scheme to newcomers. It is yet another example of the shift away from defined benefit pensions, which give a specified income to retirees based on a proportion of final salary but are a liability on the company, towards defined contribution pensions. In the latter case, the company contributes money into a pension pot for the retiree but the income the retiree receives will depend on how well their individual pension pot performs. 

‘The move towards defined contribution schemes has potentially wider implications. According to a study by McKinsey, “The emerging equity gap: Growth and stability in the new investor landscape,” annual contributions and equity allocations are lower in defined contribution plans than in defined benefit plans. Employees tend to put too little into their retirement accounts, on average only 9% of salary in defined contribution plans compared to 18% in defined benefit plans. Equity allocations tend to be lower because individuals tend to invest pensions as they would their non-retirement wealth. What is more, as defined benefit plans close to new members, plan managers move a higher proportion of assets into bonds to match liabilities. Has the shift in pension arrangements inadvertently hurt the equity market?’

But the December Mckinsey report – which we passed over at the expense of the Christmas goose – goes quite a lot further than that: the shift in pension allocations is just one reason for an impending ‘equity gap’.

Ageing populations in the developed economies will see more investors shift assets from equities to bank deposits and fixed-income instruments; institutional investors and wealthy households are seeking more alternative investments; and weak market performance of recent years could further lead to less investment in equities, although ‘it is also worth noting that individual investors can have short memories and may be willing to return to equities in the event of an extended rally’. Finally, banks, under pressure to shed risky assets, will gradually ditch equities.

But there could be a counter-balance to this, and that’s the investor in the emerging markets – as they get richer they should invest more in equities. ‘Whether emerging market investors follow the established pattern of rising equity investing will be perhaps the most important factor in determining how global financial assets are reallocated in years to come,’ the Mckinsey report says. But we don’t know when this will happen.

13 comments so far. Why not have your say?


Jan 11, 2012 at 18:10

Perhaps this may make companies offer a higher return on equities in the form of dividends to attract the capital they need which they will for many reasons not want in the form of debt.

report this


Jan 11, 2012 at 20:49

It is strange that as a nation we could afford free University education and defined benefits pensions in my father's generation, but we cannot afford them now, after all that tremendous rise in productivity and GDP in the last 30 years. I wonder who got all that extra wealth. We are well on the way to becoming a 99/1 % banana country.

report this


Jan 11, 2012 at 21:34

Equities are only good value if the companies want/need our money. I got the impression that a lot of companies are becoming more cash rich and don't actually know what to do with the money. Why should they pay dividends unless the shareholders force them to, the boards can find ways to spend the money on themselves.

To answer Franco's points,

University Education: Many more people are going to "university" when the target is 50% of the population rather than 2% as it was 40 years ago, the absolute cost of university education is much more noticeable;

Pensions: one of the problems is that successive governments refused to allow companies to build up pension fund surpluses when times were good, now companies can't afford to top up the pension funds in the way needed to meet the demands.

I don't have an answer except its always the law of unexpected consequences.

report this


Jan 12, 2012 at 07:36

Since January 2001 the FTSE is down by around 10% whereas companies generally might have expected to pencil in between 7% - 9% per annum returns in the pension fund. That is a huge gap in actual versus expected performance, and in addition the funds are expected to buy gilts. So returns are well below last century and this is the main reason why pensions are being modified downward, as are endowments etc. The ageing population is a convenient excuse. The extra proportion surviving well into the 80's could be affordable if investments were performing better. Blue chip equities are a no brainer long term buy versus UK gilts. The pension link to salary is illogical as there is no real mathematical connection between output and input, unless one stipulates that an element is a quantified deferred salary.

report this

Graham Barlow

Jan 12, 2012 at 09:49

My first job as an indentured Bank Apprentice paid a 2/3rds final Salary Pension ,Non Contributory, including at least half inheritable by the wife. Wonderful, I thought, after 42 years service retire age 59 and also go straight on unemployment benefit until 65 years and draw the old age Pension on top. By chance I looked into the average life of a Pensioner in the Bank scheme in 1958, it was just over 2 years, and bearing in mind the celebration of one who reached 100 years who mretired in 1918, many died in the first 6 months of drawing their Pension. They could not possibly meet these costs to-day with the current life span. The cost of these amazingly generous pensions was the very short duration of payment.I had to do National Service in Egypt for 2 years ,and on returning had to go before the Bank Doctor for examination, and you could be rejected from the permanent staff if not quite healthy. 2 years in the Desert made all the difference!, and I soon moved on and up. from this cloistered and claustrauphobic world., and didnt wait to draw the Pension , it seemed too risky!

report this

John Wenner

Jan 13, 2012 at 23:52

I disagree with the findings of this report and it is only based upon anecdotal evidence.

When Pension Trustees place funds for investment, they tend to look for good solid returns to meet the liabilities of paying out the pension, therefore in the past they have placed large sums into Gilts, Corporate Bonds and Property, as well as equities.

When it comes it comes to individuals investing through SIPP type funds, they tend to be less cautious, less for the long term and more willing to invest for short term gains. On this basis they tend to favour equity investments and view gilts as being a bit boring. Therefore they tend to invest less in these types of assets than the professionally run Pension Trustees.

Therefore I believe more money or a greater proportion of SIPP type pension funds will go into equities and less into Gilts and Corporate Bonds.

But here is the rub!

Since individuals put less money into SIPP type plans than Company defined pension schemes, potentially less money could be invested in all sectors and since the money has to work harder, I believe that investment horizons will shorten and market volatility could increase making the whole situation far more risky.

We will just have to wait and see…..

Just a personal thought

report this

William Bishop

Jan 14, 2012 at 10:29

Defined benefit schemes that closed to new entrants some time back, and are looking at shortening liability structures, are understandably unwilling to take on as much equity risk as previously. That said, one suspects that, for the generality of funds, there may well be (or even have been) an overreaction to previous excessively high equity allocations and the poor returns of the past decade.

My inclination is that this may help to set up conditions in which equity returns could embark on a new long-term upswing, albeit that this could still be a few years off, given the present extent of world economic and financial imbalances.

report this


Jan 14, 2012 at 10:36

The market players/ Hedge funds and CRA's Have done the pensioner no favours over recent years.They have seized on every opportunity to expand any global / financial crisis into a media hyped doom and gloom situation. They have been intent on taking the cream and awarding themselves bonuses for so doing.It is no wonder that Blue chip companies hang on to their cash, and the Genuine Investor is very much more selective .

We are now hearing of Investment banking profit warnings and Job losses to this side side of the banking Industry. It is perhaps not surprising.

We have gone through acres of miss selling, Bank collapses, commodity and currency fluctuations. All of which seem to have been speculator driven.

Time for some regulation and re thinking. Yes it would be nice to ensure acceptable Pensions for all, instead f paying for someone else's

report this

Dennis .

Jan 14, 2012 at 10:54

Why does everyone on Citywire forums always forget the Gordon Brown effect? From 1997 the treasury has been taking £5Bn a year from pension funds by removal of tax relief on dividends. That adds up to about £75Bn so far. This coupled with over stringent accounting rules (thanks again Gordon) has driven most companies to close their DB schemes. Up until 1997 the UK had one of the best pension set ups in the world, now it's one of the worst.

report this

Dennis .

Jan 14, 2012 at 11:00

Franco, free University education was possible because only about 4% of the population went there and it wasn't free, it was means tested. I went to University in the late 60's. My father was a factory worker on a modest wage (about £1400 a year) and he had to make a contribution of £270 a year to my £340 grant for living expenses although tuition was free.

report this


Jan 14, 2012 at 16:40

You could also say that as you're now getting effectively negative returns from gilts and bonds, you're forced to invest in equities in order to grow your pension . . . . .

What has in truth killed the final-salary scheme is the gradual improvement in benefits. When schemes started in the 1950s and 60s you had no widow's pension, no dependants' pension, no death-in-service cover, no increases to pensions in payment and no increases to deferred pensions if you left service. And, as Graham Barlow points out, you weren't expected to live for 20 years after retiring. Schemes that could get by on 5% employer and 5% employee contributions are now up to 30% employer and 7% employee contributions. Of course they're not affordable. Gordon Brown's 1997 raid didn't help, but it was only one nail in the coffin out of many.

report this

William Bishop

Jan 14, 2012 at 16:50

There was another Treasury/Inland Revenue stance that contributed to later problems. In the 80s and 90s, when times were good, funds in a position to do so were discouraged from building up a surplus by threats of losing tax relief on contributions. Hence many of the contribution holidays that featured in that period, as opposed to getting more in hand to allow for the possibility of harder times, which then occurred following the millenium. Government's tendency to move the goalposts around has been a particular hazard in pensions.

report this


Jan 14, 2012 at 17:06

William Bishop - I entirely agree. All pension lawyers (like me) know that the Treasury hates pension schemes - they want the tax now, not piecemeal in 30 years' time. Schemes were in fact forced by the legislation to take contribution holidays - they were not allowed to build up surpluses of more than 5%. By the time the Government faced up to the Treasury and got rid of that requirement it was 2006, which was far too late for the majority of schemes.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire Guide to Investment Trusts

In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

More about this:

Look up the shares

  • Royal Dutch Shell Plc (RDSb.L)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

More from us

What others are saying


Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add to your safe senders list so we don't get junked.


Bookies slump as £2 stake limit on terminals looms

by Daniel Grote on Apr 24, 2018 at 15:19

Sorry, this link is not
quite ready yet