Providers and IFAs have warned the Government the cost of plans to offer more certainty in pensions income could erode the value of individual pots to the point that scheme members find “unacceptable”.
Last week, the Department for Work and Pensions published a Bill to legislate for defined ambition pensions.
A summary of responses to the consultation, published alongside the Bill, revealed the majority of advisers and providers said 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, guaranteeing a certain investment return or a guarantee on retirement income that grows as people save.
The summary of responses said: “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 1 to 2 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 responded there were “inherent costs” in providing any sort of guarantee because providers had to reserve capital in order to provide it. The adviser described guarantees as a “drag on performance.”
The DWP has also dropped plans for so-called “DB-lite” pensions, aimed at giving DB sponsors greater flexibility as to how they pay out pensions to members.
This could have included removing the requirement for schemes to link pensions in payment to inflation; allowing employers to transfer members to a nominated defined-contribution fund if they leave their employment before retirement; and giving employers freedom to adjust the scheme pension age.
The DWP said it ditched these proposals after research suggested the changes would need to apply to accrued pension rights in order to make a difference to employers.
Barchester Green Investment director John Ditchfield
Defined ambition is not defined benefit so they don’t need to engage in liability matching – it won’t be as expensive as that. Maybe it will have some higher costs but it is about giving people more choice.
Kingsfleet Wealth managing director Colin Low
Whenever there’s additional time involved in monitoring investment returns or working towards a goal, there is cost.
Time is money. The same applies in all industries, so we should be used to the idea.