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.”