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Govt warned Defined Ambition guarantee costs ‘unacceptable’ to members

Providers and IFAs have warned the Government plans to offer more certainty in pensions income could erode the value of individual pots so much that scheme members find it “unacceptable”.

Later today the Department for Work and Pensions will publish a bill to legislate for so-called Defined Ambition pensions.

A summary of the responses to the consultation on the move, published this morning, says the majority of IFAs and providers believe offering any sort of guarantee on pensions “may erode the value of the pension pot to an extent that members could find unacceptable”.

The consultation suggested several ways of offering such a guarantee, including securing a certain amount of savings or guaranteeing a certain investment return. Alternatively, the DWP proposed a guarantee on your retirement income which grows as you save.

The DWP says: “Several providers made internal estimates that the cost of providing even a money-back guarantee – which should be the cheapest kind of guarantee – would be around one to two per cent of the member’s pension.

“They suggested that at this level, the cost of a guarantee plus other annual management charges may eat into the value of the pension at such a rate that growth in the fund would be prevented.”

One IFA wrote in their response there are “inherent costs” in providing any sort of guarantee because you have to reserve capital in order to provide a guarantee.

“It is a drag on performance,” the adviser said.

Although they remain anonymous in the document, 11 providers and 10 IFAs submitted responses to consultation.

Some providers “expressed sympathy” with the push for providing some form of guarantee, especially given widespread public distrust in pensions caused by “greater volatility” in financial markets and past mis-selling scandals.

One provider wrote: “The actual core idea is actually quite sensible in terms of smoothing returns for members and giving them some sort of downside protection. Some element of that does make sense. But the challenge is how to actually deliver it.”

Despite the concerns, DWP says there is “big support” for the reforms with 28 per cent of firms interested in greater risk sharing with their employees and a “clear preference” from consumers for more certainty over pensions outcomes.

Pensions minister Steve Webb says: ”These reforms meet the needs and concerns of business while, at the same time, standing up for the interests of workers who are doing the right thing and saving for their retirement.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. I’m not sure that “28 per cent of firms interested” is “big support.

    Presumably, this means that 72% are not interested!

  2. Mmmm….so will this have a feel of the old with profits contracts, incorporating a guaranteed annuity rate….just beginning to wonder if we’re going round in circles……

  3. Surprise, surprise. Employers want less risk and employees want greater certainty i.e. less risk.

    You can define an ambition, but you can’t guarantee success.

  4. A money back guarantee for a pension invested for 30 years is, in real terms, a guarantee to give back at retirement a pension worth two thirds of what was put in. Utterly, utterly worthless.

    Only someone with a gold-plated index-linked pension could be so clueless about the basics of investing as to think that anyone needs this.

    The insurers and fund managers will love it though. If someone invests their money with you for 20 years and when they want it back it’s worth barely any more than they put in, because of your high charges and incompetence, they’ll be justly aggrieved. If someone invests their money with you for 20 years and insists on a money back guarantee, and after 20 years of sitting on a large pile of cash and gilts and pocketing fees for the guarantee, you return what they put in, they can’t complain – you did exactly as they asked. Have we forgotten the Parable of the Talents?

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