THE GOVERNMENT will not force companies to offer new “defined ambition” pensions, minister Steve Webb said yesterday as he announced plans to find a third way for private sector workers to save for their retirements.
Webb wants more businesses to offer pensions that guarantee some certainty for employees, despite the near extinction of defined benefit schemes – yet will not oblige them to do so.
“This is another option for firms,” the pensions minister said. “We’re not going to force anybody to do this but we are aware that a number of schemes are looking at sharing risk with their employees as part of auto-enrolment.”
The coalition wants to help firms move towards schemes that offer more certainty than defined contribution pensions, which are prone to investment fluctuations.
Yet the government is not expected to back the move with cash, instead expecting employers and employees to share the risks associated with retirement packages.
“There must be somewhere in the middle between the old final salary schemes where absolutely every risk was on the firm – how long you lived, what happened to inflation, what happened to investments – and a pure defined contribution scheme where you put the money in but you have absolutely no idea what pension you’re going to get at the end,” Webb told BBC radio.
Henry Tapper of pensions firm First Actuarial said that the government would have to go further to convince businesses and private sector workers. “It is not enough to promote ways of rearranging deck chairs on the Titanic,” Tapper said. “Webb is going to have to offer some genuine help to the private sector.”
Shell became the final FTSE 100 firm to close its final salary scheme at the beginning of this year. Yet such pensions, which guarantee an ongoing proportion of a worker’s salary upon retirement, remain available to workers in the government sector.
The Institute of Directors responded unenthusiastically yesterday, saying that employers would be “very nervous” about government plans for more private sector guarantees on pensions.
Q and A
Defined ambition pension schemes
Q What is a defined ambition pension scheme?
A These are pensions that offer some certainty to retired workers. Yet unlike defined benefit schemes, not all the risk is piled on employers. And unlike defined contribution schemes, less risk is left with the pension holder.
Q How does that work in practice?
A In several ways. One is for a scheme to come with a minimum annual income, with more money added if investments perform well – thus protecting pensioners if investments turn sour.
Q Is this an entirely new idea?
A No, several companies already offer such pensions. Supermarket Morrisons guarantees a pension pot for employees, which the firm tops up if the stock market performs badly. Yet payments also depend on annuity rates, so there is still an element of risk for the pensioner. Other firms offer more guarantees if employees work to an older age.
Q Will this affect the auto-enrolment scheme?
A No, it shouldn’t. Auto-enrolment starts in October but will only oblige firms to offer defined contribution schemes.