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.”