Pension payouts could be boosted by up to a third under new proposals from the pensions minister Steve Webb. The Government has been running a consultation on ‘Collective Defined Contribution’ schemes which share investment risks – and costs – across a group of investors. The schemes are run like with-profits funds, and would allow investors to stay invested in higher risk assets as they approach retirement. Instead of your retirement income being paid out of a personal pension pot that you accrued, funds are pooled with those of other pension savers and retirement income is paid out of this pooled pot. These CDC schemes are popular in Holland and Denmark.
The schemes would be lower cost than current defined contribution schemes – but there are more complicated risks involved. Unlike an annuity, which guarantees a stable retirement income, income from collective schemes could vary year on year dependent on how the underlying investments performed.
A study last year by the RSA, based on modelling by Aon Hewitt, predicted how CSC schemes would have performed over the past 57 years and found that collective schemes would result in retirement income rising by 33% - and providing more predictable outcomes. However, this has since been contested by insurer Aviva – and the schemes have had teething issues in Holland where certain providers have cut payouts.
Hargreaves Lansdown Head of Pensions Research Tom McPhail said that claims to be able to boost pension payouts at no additional cost or risk are always going to prove popular, particularly in the run up to a general election.
“The arguments in favour of these schemes are unproven. There is clear evidence both from recent Dutch experience and from our own with-profits funds that such schemes can go down as well as up,” he said. “‘We believe that much can be done to improve the existing UK pension system. A well-judged price cap on auto-enrolment schemes, reform of the regulations on the sale of annuities and the promotion of long term investing would all have long lasting and beneficial effects.”
Pensions minister Steve Webb has recently bought himself and the Department of Work & Pensions more time to properly configure the pensions price cap proposal. It was due to be rolled out in April, but now the 0.75% annual charge cap will be implemented in 2015.
Webb has been credited with transforming the UK pension system. Since his appointment he has initiated auto-enrolment, a price cap and this week announced proposals for both CSC schemes and plans to allow pensioners to top-up their state pension by up to £25 a week.
