In recent years, firms have been closing final salary (or defined benefit) pension schemes as increased life expectancy, high inflation and poor investment performance have made it increasingly expensive for them to offer retired workers a guaranteed payout based on their earnings.
In May, a report by consultancy firm Towers Watson found that more than a quarter of FTSE 100 firms had closed the schemes for all workers, and that the accelerating pace of closure could mean they were all closed within a decade. The government's own figures show that across the UK just 841 final salary schemes remain open.
Most firms have replaced them with less generous defined contribution schemes, where the eventual payout is based on the performance of the funds in which the scheme is invested, and so the risk is passed from the employer to the employee.
These are typically the schemes used by employers when auto-enrolling workers into pensions, under the government scheme which will see up to 9 million new savers signed up over the next five years.
To encourage businesses to offer pensions with more certainty about payouts, the government has proposed "defined ambition" schemes, which would split the savings risk between workers and their employers.
It has also outlined possible changes to rules around final salary schemes to make them cheaper and easier for companies to continue to offer them.
"Final salary pensions have been in long-term decline, and if we do not act could disappear altogether," said Steve Webb, the minister for pensions. "We want to help the best employers offer good alternatives, including new forms of salary-linked pensions.
"Our proposals for defined ambition pensions are designed to reinvigorate workplace pensions, providing people with more certainty about what they will get in retirement."
A range of suggestions as to how this could work are outlined in a consultation paper, Reshaping workplace pensions for future generations, including a "money-back guarantee" to ensure that the amount of money someone gets out of a pension scheme at the point of retirement or transferring out is not less than what they paid in.
The document said that while the probability of having to put this guarantee into action would be "close to zero" for a long-term retirement saver, it could have "real value" when someone needs it.
An alternative suggestion was for "retirement income insurance" which would be bought gradually from a worker's fund as they approached retirement and would pay out a guaranteed minimum income if their investments failed to perform.
It also outlines the possibility of collective defined contribution schemes, which pool workers' assets. When people using this type of scheme retire they take their income from the asset pool rather than buying a retirement income with their pension pot as they would with a traditional defined contribution scheme.
Raj Mody, head of pensions at consultancy firm PwC, said the proposals had a lot of merit, "but the stumbling block will be whether companies have the appetite to provide these types of pensions. Regular revisions to pension rules have left employers disillusioned, with little appetite to take on any more risk than they need to."
Mody warned that the cost of providing any kind of guarantee on a defined contribution scheme "could be both expensive and prohibitive for employers and providers", and said there could be more value in educating members as to how the schemes work and the risk and rewards that come with it.
The consultation paper also suggested that removing statutory requirements for employers to raise pensions in line with inflation could encourage them to continue providing final salary schemes.
This suggestion was criticised by Laith Khalaf, head of corporate research at IFA Hargreaves Lansdown, who said it would introduce uncertainty for savers and could mean they lose out on a huge amount of money. He gave the example of a £10,000-a-year pension which, without inflation increases, would add up to £250,000 over 25 years, but if inflation was at 2% a year would add up to £320,000.
"Under this new proposal workers could save diligently throughout their lifetime, only for the rug to be pulled out from under them at the last minute," he said.
Original Article
Source: theguardian.com
Author: Hilary Osborne
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