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New pension scheme could boost income by 30% – Government

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27/01/2014
UK workers can increase their state pension entitlement by as much as 30% in exchange for fewer guarantees on their retirement income, under proposals by pensions minister Steve Webb.
New pension scheme could boost income by 30% – Government

As part of legislation expected to be included in the Queen’s Speech, the Government wants to shake-up the pensions industry by backing controversial occupational schemes commonly used in the Netherlands.

Speaking to The Times, pensions minister Steve Webb advocated bringing in ‘Collective Defined Contribution’ (CDC) schemes to the UK to help increase pension payouts by as much as 30%.

Webb said: “Some of the best pension schemes in the world are run on a collective basis. I would like to see British workers have access to schemes run on this basis”

Collective defined contribution schemes are like a with-profits fund, sharing risk across a broad pool of investors.

According to Hargreaves Lansdown, these schemes do not necessarily produce higher investment returns than any other type of scheme, but their advantage lies in being able to share costs across members and the increased scope for members to remain invested in risk-assets such as company shares later into retirement.

Plans similar to this were previously rejected in the UK because the dangers were considered too great, but ministers now believe that they can build in enough safeguards into future pension schemes to protect savings.

Supporters of CDC schemes say that they offer better value and more certainty than most current pension products because they allow workers to pool their pots, thus sharing the risks of investment.

However, critics says that collective schemes are more risky because, unlike existing occupational schemes, workers are not offered a guaranteed income for life.

Instead, pensioners see their income throughout retirement vary depending on the performance of the underlying investments.

Tom McPhail from Hargreaves Lansdown said: “Claims to be able to boost pension payouts at no additional cost or risk are always going to prove popular (particularly in the run up to a general election). The arguments in favour of these schemes are unproven. There is clear evidence both from recent Dutch experience and from our own with-profits funds that such schemes can go down as well as up. They are complex, uncertain, unproven and rely on a constant flow of new members for their long-term sustainability.”

“We believe that much can be done to improve the existing UK pension system. A well-judged price cap on auto-enrolment schemes, reform of the regulations on the sale of annuities and the promotion of long term investing would all have long lasting and beneficial effects.”

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