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DB plans risk a rerun of debacle

Government proposals to shore up defined-benefit schemes risk repeating the scandal over endowment mortgages by creating a gap between customer expectations and reality, warns Standard Life.

The deadline for responding to the Government’s consultation on risk-sharing in DB schemes passes this week and Standard Life head of pensions policy John Law- son warns that both opt- ions the Government has put on the table contain significant risks.

Conditional indexation would allow schemes to withhold increases to pensions in payment and revaluation of pensions in deferment if the fund is weak. Indexation would be restored when the fund recovers. There are also proposals to allow increases in retirement age if mortality improves.

Collective defined contribution allows the employer to pay a fixed contribution into a collective fund, with the risk shared between members. Benefits can be cut if the contributions prove insufficient to pay the target pension.

Lawson says conditional indexation would be a “get-out-of-jail-free card” for weakly funded defined-benefit schemes and considers that both proposals risk disappointing consumers’ expectations.

He says: “It feels like a rerun of with-profits where people had genuine expec- tations that their endowments would pay off their homeloans.”

Aegon Scottish Equitable head of pensions development Rachel Vahey also warns of potential consumer detriment. She says: “I really do not believe there are enough benefits in the Department for Work and Pensions’ options to warrant what is going to be a lot of additional work, complexity and costs. There is considerable potential for member misunderstanding over what benefits they can rely on.”

Lawson says the Government should look at offering post- and pre-retirement guarantees to defined-contribution funds using hedging, with the guaranteed cash sum able to be turned into a defined benefit using deferred annuities or guaranteed income drawdown.

Hargreaves Lansdown head of pensions research Tom McPhail says: “One could level many of the same criticisms at Lawson’s proposals as he has made of the risk-sharing package. There is a high level of complexity, cost and relatively few guarantees that are likely to deliver.

“It is good to explore these solutions but I think we are a long way from a definitive answer to the problem.”


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