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Govt could introduce auto-transfer carve out for guaranteed pensions

Steve Webb 480 LibDems DWP

The Government could introduce a legislative carve out for guaranteed pensions as it examines the practicality of introducing automatic transfers for small pots.

The Institute and Faculty of Actuaries has today published a report investigating the potential for introducing affordable guarantees into the UK defined-contribution market.

This follows a challenge to the industry from pensions minister Steve Webb to develop ‘money back’ products which guarantee the saver gets back at least the nominal value of the total contributions they and their employer have made.

Institute and Faculty of Actuaries spokesman Scott Eason – one of the authors of the report – says money back DC guarantees would need to be provided for a charge of between 0.6 per cent and 1 per cent to be attractive to savers.

He says the idea of a guarantee makes most sense in the “consolidation phase”, when someone is 10 to 20 years from retirement.

He says: “The value of a guarantee will depend on the impact of charges on expected returns and the amount of risk being removed.

“A floor is a very easily understood concept and could help avoid the potential for disappointment when someone reaches retirement. It would also make communications between the industry and consumers a lot easier.

“We think 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 and affordable option.”

One of the potential problems with guarantees highlighted in the report is portability. The Government wants to introduce a new system where small pension pots transfer automatically when a person switches jobs.

If this happens, people could lose any guarantee they had with a previous employer.

Webb (pictured) says the Government is considering introducing a legislative carve out so guaranteed pensions are not automatically transferred when a person changes employer.

He says: “We have to consider how consolidation will work in a world with guarantees.

“One possible solution would be to have a carve out, so if is in a scheme with a guarantee the idea that the pot follows the member would no longer apply.”


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. And exactly who is going to advise on it, IFAs?

    Then what happens as it does with so many government initiatives, it goes wrong?

    Oh, that’s OK, we’ll blame the iFA who advised the client and claim the loss against their PI/Assets.

    And what is more, who the heck just wants their money back after saving for decades. savers want growth so that their retirement can be meaningful and prosperous, most guarantees fail the reasonableness test as they depend on their being sufficient assets to back them up.
    Not always possible.

    Sounds like one of the more dodgier schemes thought up by government

  2. How a person’s mind works after realising they’ve made a poor decision:

    “I’m going to dive off this cliff.”
    “But it’s fifty feet up and the sea below is full of rocks, you’ll break your neck.”
    “You’re right, I won’t dive off this cliff.”

    How a bureaucrat’s mind works after realising they’ve made a poor decision:

    “I’m going to dive off this cliff.”
    “But it’s fifty feet up and there’s rocks, you’ll break your neck.”
    “You’re right, we need to mitigate the risk by commencing a massive digging operation to remove the rocks below. Also some sort of flume will probably decrease the impact of falling from this distance. I dunno, we’ll get whoever puts in the lowest bid to figure it out.”

    *£300m later*

    “You’ve spent £300m, the water is still filled with rocks, debris and abandoned mining machinery and you’ve wrecked the coastline. And there’s still no way you’ll survive a fifty foot fall into that water.”
    “You’re right, we need to expand the budget in order to design some sort of parachute.”

    *£600m later*

    “You can’t design a parachute that will open quickly enough. And the coastline is still an absolute disaster area and you’ve destroyed the local tourist industry.”
    “You’re right, it would be prudent to postpone diving off the cliff until the next Parliament.”

  3. he is about to tie himself in knots. He wants guarantees and small pots follow me, but the two cannot reside in the same regulatory framework.

    i hope he kicks the small pots into touch and focuses on the guarantees

  4. hang on…. guarantees come at a cost…. just look at Equitable Life and other providers who are now on their knees due to guarantees they can’t (or can barely afford) to keep.

    We’ve got Miliband saying there should be a cap on pension charges of 1% per annum yet now we’re talking about having guarantees which, themselves, apparently could cost 0.6% – 1% – I assume that’s per annum??!

    A ‘carve out’ pension – sounds very straight forward and something the average man in the street will no doubt understand.

    For those who don’t, they will then need to seek advice, but wait, we’re potentially capped at 1% and the guarantee may well be costing that – so there’s no room for provider charges, to buy a fund nor to seek advice (assuming that guarantee is annual).

    Most new clients who have anything other than a Personal Pension generally haven’t a clue what’s going on with their pension. Particularly where it’s DC.


    Simplicity and transparency is needed. As consistency – at least for a little while.

    *rant over*

  5. Nice to see they really thought this through – not!

  6. Cost can only be an issue in the absence of value. If these guarantees provide value then they should be introduced to the market for smaller pots. People like knowing what they are going to get as a minimum so they can plan for a better retirement. The products on the market now can ensure Pensions look after people as opposed to people looking after Pensions.

  7. Another candidate for the “Laughing Stock of the Year Award”.
    When I was a young lad I used to think politicians were clever people… stupid was that?

  8. What about the annuity trap Mr Webb?

  9. MetLife have been doing this type of product for years, its nothing new, about time the government got with the times!

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