Proposed reforms to final-salary pension schemes: too little, too late
Defined benefit pension schemes have been under the increasing threat of extinction in recent years, with most company schemes closed to new members and new employees having to bear the risk and uncertainty of defined contribution schemes.
The Government has therefore been seeking to develop a new category of pension that will give employees some certainty about how much income they will receive in retirement, yet be cheaper for employers to run than traditional defined benefit final salary schemes.
The various options set out comprise of 1) a "money-back guarantee" to ensure that the amount of money someone gets out of a pension scheme at the point of retirement or transferring out is not less than what they paid in; 2) a "retirement income insurance" which would be bought gradually from a worker's fund as they approached retirement and would pay out a guaranteed minimum income if their investments failed to perform; and 3) a collective defined contribution scheme, which pool workers' assets; in effect pensions would be drawn from the pool rather than buying an annuity.
Whilst this consultation process should be welcomed as it acknowledges the gravity of the problem, I am not convinced that it will achieve anything as all of these proposals will almost certainly lead to some form of increased cost. Indeed, the recent focus on Workplace Pensions has very much highlighted the vital importance of keeping pension costs to the absolute minimum.
In addition, it is difficult to understand why employers will want to put in place a pension scheme which increases their liability, and surely if such a scheme was to be brought in, then the time to announce it was at the start of the Workplace Pensions initiative?
This is a classic example of the Government doing too little, too late. After all, can you really see there being any appetite from employers or employees to join a new type of pension scheme when they have just jumped through all of the hoops associated with Workplace Pensions? I think not.
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