Final salary pension benefits under threat

[TrueBlueTerrier]

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Employers could be given the right to remove final salary benefits for millions of workers when they leave a job, under options being considered by the government.

Currently, members of final salary, or defined benefit (DB), schemes, which are considered “gold standard” because of their guarantees on investment and income, remain entitled to their benefits even if they change employers.


But an option set out in a report on workplace pension reforms published on Thursday suggests a new “slimmed down” benefit which would only see the DB promise lasting as long as the employee was part of an employer’s scheme. If that employee moved on, they would be offered a cash value for their rights to take to a new pension scheme.

Writing in Thursday’s Telegraph, Steve Webb, the pensions minister, said: “Our objective is pensions that employers can afford and employees can appreciate.”

The option, to be set out in the Reinvigorating Workplace Pensions paper, comes as the government looks for ways to halt the decline of final salary schemes in favour of defined contribution plans, where members have no guarantees about their eventual pension income.

With 11m workers expected to be automatically enrolled into workplace pensions over the next five years, the minister has been looking to create a “middle ground” for pensions that offer more certainty than defined contribution plans.

Another option in Thursday’s report is “enhanced” DC, where a “with-profits” style smoothing investment approach could be applied to pension funds to ensure a less uncertain retirement outcome.

This would follow the approach of Dutch “defined ambition-style” schemes, where members’ funds are pooled, rather than being saved individually, so that losses and gains are shared.

Another proposal gives members of DC schemes the option to pay higher monthly contributions into their pension to remove some of the risk. This “money safe” guarantee, where members would at least get their contributions back at retirement even if their pension pot fell in value, was flagged by the minister earlier this year.

“There is, of course, a cost to greater certainty,” he said.

“But our evidence is that people of all ages and all income levels value greater certainty about their retirement income.”

Other options include getting more value for money on charges, better governance of funds and ensuring that people who are not making active decisions about their investment are “properly catered for”.

The full paper is expected later on Thursday.

[TrueBlueTerrier]

'A New Future for Workplace Pensions'

Membership of workplace private sector pension schemes has been in decline for nearly half a century. Many governments have passively watched this decline whilst some have actively made matters worse.


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The introduction of automatic enrolment into workplace pensions is already a huge step forward. Starting with the biggest firms, businesses now have a legal duty to choose a pension scheme for their workforce and to make a contribution into it. Employees will also contribute and the Government chips in through tax relief.

Over the next five years, around 11 million workers – mostly people who have no current pension provision – will be placed into workplace schemes.
But we need to go further, and that is why we are today publishing our strategy to ‘reinvigorate’ workplace pensions.

The first part of this strategy is to promote high quality in the schemes used for automatic enrolment. This includes features such as value-for-money on charges, good governance and making sure that people who make no active choices about how their money is invested are properly catered for. One option would be for pension schemes to be given ‘star ratings’ so that employers knew that they were choosing a quality scheme and employees valued that provision.

Our objective is pensions that employers can afford and that employees will appreciate. Whilst most firms will no longer offer a traditional ‘defined benefit’ (DB) pension, where the amount you get is a guaranteed proportion of final salary, many are willing to go for more than a pension where the only thing that is certain is how much money goes in. We are therefore working on creating pensions which offer greater certainty than pure DC pensions, but without all the cost and burden of DB – what I have christened the ‘defined ambition’ or DA pension.


Our document today gives more detail about what the Defined Ambition pension could look like.

One option is slimmed-down DB. For example, the future pension promise could be limited to a cash figure at retirement with any inflation-protection post-retirement conditional on the investment performance of the fund. Alternatively, the pension promise could last only as long as you work for your current employer. When you leave, it crystallises into a cash value which you can take to a new pension scheme. This approach would be valued by firms who do not want to retain pension obligations for workers who have left them many decades earlier.

Another option is enhanced DC. This could mean adding some form of ‘smoothing’ so that the pension outcome is much less uncertain than under pure DC. There is, of course, a cost to greater certainty. But our evidence is that people of all ages and all income levels value greater certainty about their retirement income.

Getting millions more people into workplace saving is a huge start, but it is not enough. There is now a lively debate about how we make sure that there is not just a greater quantity of people in pensions but a greater quality of workplace pension provision.
Our report today is an important milestone in setting out how that vision can be delivered

[CORTINA]

Pension now for the under 25s is becoming a luxury they cannot all afford..... The amount of spendable income is reducing as more things and their costs have to paid for.....

The days of buying your own house for MANY youngsters is beyond their reach....

The days of...... having a good pension, buying a house and paying the mortgage, having a good holiday, running a car, pay your utility bills without worry, meeting the family needs, buying a football season ticket and save money for the future.... the days of affording all of that with ease....are Gone for so many.

Pension annuities are paying out lower pensions per year over the past 5 or more years.... money is short while working and you are receiving less and less with a non final salary when you retire... Its a hard and unjust world out there .....some put money into an ISA tax free savings account instead of putting money into AVCs extra pension.... Then not having all your eggs in one basket and you also have access at anytime to some of your money if needed quickly...in a pension you a stuffed....

The money builds up nicely in a ISA account 2k a year is .... 20k plus compound interest after 10 years... as an example.
Lower of more input ..pro rata......or just put in what you can afford per month...

I grandfather told me ...when i started work...save 10% of your take home pay and you will never be poor... you are on your own in this world... learn from others mistakes...