A LEADING business group yesterday warned that government proposals to combine private pension schemes into a single entity could cut payments to savers in some years.
The CBI said a plan by pensions minister Steve Webb to combine the defined contribution schemes of major companies would equate to a “cross-subsidy between members” and mean they “may have to take a reduction in benefits” for some years.
Webb believes economies of scale would improve returns over the long run and reduce fees. He says major companies are interested in the plan.
At the moment defined contribution pension schemes are generally administered in individual pots connected to the savers’ former employers. Unlike defined benefit schemes – which are also known as final-salary – defined contribution schemes do not guarantee a fixed level of income in retirement.
Supporters of Webb’s plan say combining defined contribution schemes into larger entities would spread the risk and offer the best of both worlds.
But Tom McPhail of Hargreaves Lansdown said “cultural, regulatory and fiscal barriers” make the plan unlikely to succeed. “It is worthy of note that in the Netherlands where such schemes are common-place, solvency issues have led to cuts in pensioners’ benefits,” he added.
The Department for Work and Pensions yesterday said it expects to publish the plan, which was first reported by the Financial Times, by the summer.