Private pensions industry faces radical restructuring
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The coalition is drawing up proposals for a radical reshaping of the private pensions industry under which “big, household-name” companies would come together to create a pooled fund which could ensure a more generous income in retirement.
In recognition that the era of defined benefit schemes is over, Steve Webb, pensions minister, said he wanted to see the government facilitate more collective defined contribution schemes (CDCs).
Mr Webb said, in an interview with the Financial Times, that he had held a meeting in recent days with “big, big employers, household name firms” who had expressed interest in shifting to a collective scheme.
The main attraction would be size – a large, pooled fund would allow economies of scale that could substantially lower charges. As collective schemes can invest over a longer period, they could also put money into riskier, higher-yielding assets such as infrastructure, according to the Liberal Democrat minister.
“If you can make it work, you’ve got the chance for significantly better outcomes,” he said, adding that potential returns could be 30-40 per cent better, when taking into account the impact of lower fees, compounded over a lifetime.
However, such a move would prove controversial within the fund management and insurance industries. John Ralfe, an independent pensions expert, said Mr Webb was looking for a “magic money tree” which did not exist.
“A CDC plan would require strict and transparent solvency rules, with the ability to cut pensions in payment,” Mr Ralfe said. The rules would even need to be able to “claw back pensions already paid if solvency deteriorated due to poor investment performance or increased longevity forecasts,” he added.
He said the UK should learn from the experience of the Netherlands, which has had a CDC for years. Dutch pensioners can have their payments reduced, which can “cause a political stink” despite the higher rates of return on offer.
The minister’s efforts come at a time of growing concern that the combination of high pension fees, disappointing returns and the rising cost of annuities will discourage workers from saving for retirement at all.
Over the past two decades, a major shift away has occurred from final salary pensions – where people get a proportion of their salary in retirement – to pensions which depend on workers putting in money over their working life.
Under a typical defined-contribution scheme, a worker builds up a lump sum of money which, on retirement, is turned into an annuity – a type of insurance policy that provides a regular income. However, the collapse of equity prices in the downturn has badly shaken public confidence.
The minister said two models could be available. Under one of them the industry would set up the collective scheme itself, with the government only providing a regulatory framework. Under the other, the state would provide an “underpin” to afford more certainty. “You could imagine a DC protection fund or something that pooled some sort of insurance contribution and provided certainty,” Mr Webb said. “There could be a role for the private sector.”
The previous Labour government examined the idea only to conclude in 2009 that, while such a scheme could give “potentially better pension outcomes”, employer demand would be “limited”.
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