October 23, 2012 5:09 pm

Money safe pensions may not be portable

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Pension pots which carry “money safe” guarantees may not be transferred automatically with a worker when they move jobs under ideas being considered by the government.

Earlier this year Steve Webb, the pensions minister, floated plans for a new “money safe” guarantee to offer workplace pension members some certainty when saving into risky defined contribution (DC) funds.

Currently, millions of workers saving into these DC schemes have no certainty about the final size of their pension pot, unlike defined benefit (DB) pension plans, where the employer takes on all the risk of saving for, and paying, a guaranteed pension.

Plans outlined by the minister could see savers of the future sold guarantees, which would ensure they at least got the value of their contributions back. This was one of the ideas collectively known as “defined ambition pensions”.

Speaking at the 21st Century Pensions conference in London on Tuesday, Webb said there had been much interest in the concept of guarantees, not only from consumers but businesses.

However, the minister said he recognised that there was “tension” between defined ambition pensions, which carried money safe guarantees, and his plans to allow “pot follows member” or easier pension consolidation.

“Developing products such as a ‘money-back guarantee’, where at the very least a pension fund returns the value of contributions, is one way of ensuring risk does not lie solely with the individual,” he said.

“However there are issues with guarantees moving with pensions. One possibility is to allow schemes with guarantees to be exempt from automatically transferring the pension pot when the member moves to a new job.”

In response to concerns that the guarantees would be expensive, the minister cited figures of guarantees costing 40-60 basis points, but did not make clear what kind of guarantee that would buy.

Meanwhile research released by the The Institute and Faculty of Actuaries suggested that investment techniques could be used to pave the way for “guaranteed pensions”.

“A number of investment techniques already exist in the UK pensions market that with the right engineering would be suitable for this purpose, including life-styling and volatility targeting,” said Scott Eason, spokesman for the Institute and Faculty of Actuaries

“However there are also a number of challenges to using techniques like these, not least the effective and clear communication of a complex product that delivers to a simple ambition, namely to save for retirement whilst guaranteeing not to lose capital and without sacrificing potential for capital growth.”

Eason said value would depend on the impact of charges on expected returns and the amount of risk being removed.

“We conclude that a full ‘money-back’ guarantee may not be practical, but that a guaranteed product to protect a built-up pension pot as individuals near retirement could be an attractive, affordable option.”

“The next challenge is to create a model for this product and look at the education and communication that would be needed to support it.”

Meanwhile, speaking at the same conference, the Association of British Insurers cautioned the minister that the “risk sharing” model being considered for workplace pension reform could not be easily imported into the UK.

‘We must be wary of assuming we can just easily import collective pension provision from the Netherlands, Denmark or any other country that has vastly different labour market rules and norms from ours,” said Huw Evans, director of operations at the Association of British Insurers.

“The UK has a population of 62m people, not 16m like the Netherlands or the 5.5m population of Denmark.

“We need to develop future thinking on pension provision in a way that will support the UK’s population and labour framework if we are to be in touch with what employers want to contribute and preserving a labour market that maximises employment levels.”

Evans said risk management was not free and if the desire was to provide greater guarantees, “the customer needs to be absolutely clear about the cost and potential inflexibility of guarantees as well as the impact on returns”.

“This is a debate worth having, but it is not one with any easy answers,” he said.

The government is expected to publish its consultation on workplace pension reform before the end of the year.

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