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Govt floats DC pension lifeboat fund to offer guarantees

Steve Webb 480 LibDems DWP

The Government is considering creating a levy-financed lifeboat fund to provide a form of guarantee for members of defined-contribution pension schemes.

In July, pensions minister Steve Webb urged providers to develop pension products with “affordable” guarantees as part of Government attempts to boost occupational saving.

Speaking at an Institute and Faculty of Actuaries event in London this week, Webb (pictured) acknowledged insurers may be reluctant to offer these products because they would be forced to hold extra capital to support the guarantee.

He said: “We are looking at ways to underpin the DC guarantee without requiring providers to hold massive amounts of extra capital.

“We already have the PPF for defined-benefit schemes, but could you have a protection fund for defined-contribution tail risk which might not be subject to the solvency requirements the industry faces? That is an idea we are exploring at the moment.”

DWP sources say if the Government goes forward with the proposal the set-up costs would likely need to be met by the industry rather than the state.

It remains unclear whether employers or pension providers would be required to pay the levy for the scheme.

Hargreaves Lansdown head of pensions research Tom McPhail says: “It would be great if this can be made to happen but I am sceptical as to whether this is actually achievable. The industry’s track record in delivering guarantees to savers has not been good. The cost of the guarantees is still likely to add a substantial amount to the cost of the product.”


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Eh? Exactly what is this then? Do advisers that have clients in a DC scheme with this notional underpin now have to have AF3? Who’s balance sheet is the risk going to sit on? How with the investment choice be restricted or will it be a free for all for clients? Will they throw caution and ATR quetionnaires to the wind and go balls out?

    Seems to me to be a dangerous path to tread to off the opportunity to have one’s cake and eat it!

  2. I think I can hear the distant rattle of a levy fee note arriving on all IFAs desks in the near future…(those that are left after RDR of course)

  3. Save yourself a lot of work – it’s not possible.

    Guarantees against unpredictable events like financial meltdowns, war, climate change, demographics etc. etc. ? ?

    Good luck with that project.

  4. Low-cost guarantees with low capital requirements? What a tremendous idea.

    Unfortunately there are a number of issues.

    1. Any guarantee that is meaningful to a customer costs money to provide because it will have some probability of being called upon.

    2. The more meaningful the guarantee the more costly. Is money back after 40 years any good – not really!

    3. Does the government really want the industry to take such risks without showing it has the financial resources to back them? We may not like Solvency II much but it does enforce some financial discipline and strength.

    4. A levy ensures that if there’s a hit, it hits all companies from the reckless to the prudent.

    Politicians – we unsubscribe from your pensions challenges chucked at us.

  5. I tell you what why dont we have something related to earnings which is paid for by deductions from earnings in return for a guaranteed pension – oh wait a minute wasnt that SERPS et al?

    As usual we have Governments trying to transfer the problem to the private sector but then after failing to do it themselves telling the private sector how to deliver what they failed to do!

  6. The government has learnt nothing from previous scandals in relationship to guaranteed products. I would ask this minister to go back and review the Equitable Life, Lehman Bros and Key Data miss-selling scandals before it forces guaranteed products onto the industry.

    Maybe the government would like to stand as guarantors the future collapses if they are hell bent on forcing guaranteed products on the industry. I suspect that if this was the case the Treasury would soon put an end to that idea.

    Although this may sound like a good idea in reality the losers would be the consumer having to pay higher premiums for a levy that would only add costs and in reality what is needed is greater education of financial products and greater access to advice.

  7. What is to be guaranteed ? The fund value ? The annuity amount ? Sheer madness from a minister who is already beginning to show that he has no understanding of anything – just like his 650 colleagues.

  8. We use to have plenty of guarantees in the past.

    Traditional with profits use to have a guaranteed reversionary rate circa 3% pa

    Unitised WP when first launched use to have a guaranteed growth rate circa 4% pa

    Deferred annuity contracts purchased a guaranteed minimum pension for each year of service.

    Deposit Administration schemes often had guaranteed minimum interest rates

    We use to have GMP until the Govt knocked it on the head.

    Guaranteed annuity rates use to be common but now found only in old pension plans.

    Personal pension holders use to even be able to include a minimum guaranteed fund on death via offset life cover and use to be able to guarantee their contributions in the event of long term sickness or disability ( Valuable protections missing from NEST ) but stakeholder knocked these optional guarantees on the head.

    There were plenty of guarantees IF you wanted them.

    But due the high cost of provision and FSA and Government interference these guarantees are pretty much gone.

  9. Fantastic thought process, one which I would very much like to apply to my own business.

    Seems to me that what is being proposed here is as follows.

    Joe Public hasn’t got a pension.
    Joe Public should have a pension.
    Joe Public are reluctant to save.
    Joe Public would be more likely to save if the fund had guarantees.
    Give Joe Public the guarantees at no cost to Joe Public but at great cost to the providers and advisers

    Errrr, hello, what planet are we trying to colonise now?

    How about I try and introduce a mnimum income guarantee to me and my staff at no cost to me, but at a cost to the rest of the populace. hat might enable me to meet the costs of providing the no lose guarantee that the Minister thinks Joe Public should get in his pension.

    Ian Coley
    Medical Investment Services

  10. In the dim and distant past, the Post Office used to sell government backed annuities. Perhaps we should go back to those good old days. Maybe we could develop the theme further with government-backed deferred annuities. That way, the cost of guarantees would be met by all taxpayers, wouldn’t it?

  11. When will this meddling ever end?

    When will the pensions industry come together as one, rather than have numerous, often pointless, industry groups all trying to fight their own corner, and say to the DWP / Govt etc. that enough is enough?

    Most think that AE is a complete dogs dinner, but all we see is an opportunity to make money, rather than lobby for a simple, effective, pension system. As for RDR…perhaps the FSA should have concentrated on another 3 letters…RBS!

    But wait…

    A DC fund with a guarantee…With Profits…remember these?

    What about a guaranteed annuity rate too?

    Better still…how about reinstating SERPS?

  12. At last we are trying to learn from others
    Australia have a compulsory scheme but they also have minimum returns, which I believe thius year has gone to 9% The sell in the UK currently is if you save for 40 years we will give you a return of 3.5% and we complain at banks paying these figures. The major issue is the sheer unpredictability of pension funding and until we deal with this you will get low take up rates, let alone the AMC for the NEST scheme of 2% until they have a critical mass, what ever size that is

  13. sort out annuities first 25th October 2012 at 6:43 pm

    his big problem is to sort annuities and no i am not talking about OMOs.

    the value is perceived to be poor irrespective of the provider. so we need a new approach. just don’t listen to Michael Johnson in looking for a solution

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