The idea of a ‘defined ambition’ pension scheme has been kicking around for a while courtesy of pensions minister Steve Webb.
In April 2012, he raised the idea of a pension scheme where neither the employer nor the employee has to shoulder the majority of the risk, as is currently the case in defined benefit and defined contribution schemes respectively.
Now the government is consulting on making that idea a reality with its paper ‘Reshaping workplace pensions for future generations’.
The consultation, which closes on 19 December, describes defined ambition as “seeking hard guarantees”. This moves away from another potential interpretation that focuses on a targeted pension income.
Four options have been proposed by the consultation:
• A money-back guarantee: a scheme where at least the nominal value of contributions is guaranteed. This could appeal to new auto-enrolment savers who are anxious about the value of their investments going down. It would depend on insurers’ appetite to build relevant products.
• A capital and investment return guarantee: this set-up would focus on the mid-point of the pensions lifecycle, where the focus shifts to preventing loss of capital. A guarantee would be purchased by a fiduciary on behalf of the member to provide a guarantee for a fixed period.
• Retirement income insurance: this would address the single risk of buying an annuity. On approach to retirement, each year a fiduciary would purchase an insurance product with a portion of the pension pot to insure a minimum income.
• Pension income builder: this approach mimics a similar Dutch model and combines the purchase of a series of deferred annuities with collective investment into risk-seeking assets.
Selecting an appropriate model is a complex task and advisers have concerns.
“In my experience very few individuals have any idea about the level of income they require in retirement and only a slightly clearer idea of when they would like to retire,” said Allan Maxwell, director at Corporate Benefits Consulting.
“I find that when the desired retirement age is clear it is usually much younger than can be achieved with the level of savings accumulated.”
This Chart shows the number of active memberts of private sector occupational pension schemes by status and benefit structure, according to the Office for National Statistics.