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Pensions minister proposes half-way house ‘defined ambition’ saving scheme

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UK pensions minister Steve Webb yesterday set out a series of workplace pension reforms, including 'defined ambition' (DA) schemes.

The Government sees DA as a way of bridging the perceived gap between the two main pension saving models in the UK: defined benefit (DB) – where the employer takes on the investment risk – and defined contribution (DC) – where the individual takes responsibility for their savings.

With a DA pension, risks are shared between employer and employee, offering greater certainty to savers about the final value of their pension pot than in DC and avoiding the risk of DB, which has become too costly for most employers.

Last month, the Government launched its auto-enrolment scheme, which will see up to 11 million people saving for their retirement for the first time. Stephen Cook a spokesman at the Department for Work and Pensions (DWP), told HR magazine the Government needs to "go further".

He said: "Defined Ambition is being brought in partly for the people who may opt-out of auto-enrolment and also to encourage a new generation of savers.

"We want people to go further with how much they're saving."

In a consultation paper, Reinvigorating Workplace Pensions, the minister has suggested a 'slimmed down' DB scheme which could see the end for 'final salary' schemes. These currently have guarantees on investment and income and employees remain entitled to their benefits even if they change employers.

But in a 'slimmed down' DB scheme, the pension would only last as long as the employee was part of the employer's scheme. If they left, the money would be converted into a cash lump sum, which they would then have to put into another pension investment.

Another option outlined in the paper was a 'money-back guarantee', where the saver gets back at least what they put in, even if their pension pot fell in value. This would be funded by a levy on members' funds. While an employer might opt to pay the levy for an individual, it is likely the payment would be made by the member, relative to their funds.

Webb said: "Automatic enrolment is a huge step forward, but it's only the start. We must ensure people are saving in high-quality, value-for-money pension schemes.

"For nearly half a century, we have seen declining numbers of people in workplace schemes. I am determined to reverse this trend and ensure we have pensions that are affordable to employers and attractive to employees."

He added: "Now is the time to reinvigorate workplace pensions, if we simply stand by, as too many previous governments have, another generation could miss the chance to put something by for their old age."

Morten Nilsson, CEO of pensions provider, Now Pensions, told HR magazine: "Defined ambition is a great idea, but I don't think the UK market is ready for it.

"The market is just too fragmented at the moment, there are far too many providers and many other challenges. We are just not in the right place for it yet."

Nilsson added: "If you start to offer such schemes and guarantees, then you need regulation; regulation costs money and so Government must ensure we have an economic environment that can cope with change."

Joanne Segars, National Association of Pension Funds (NAPF) chief executive, said: "We have been calling on the Government to take action to reinvigorate workplace pensions for some time, so it's good to see it setting some ideas out for debate.

"This is a clear and timely paper that is asking the right questions as we move ahead with auto-enrolment. It also recognises that building scale and having fewer, larger schemes could be vital to delivering well-governed, value-for-money pensions for workers.

"Pensions are now very polarised, particularly in the private sector, with older 'final salary' pensions at one end, and the newer 'defined contribution' system at the other. Either the business bears the risk of paying a final salary deal, or the saver carries the risk of not knowing exactly how much they will get."

Segars continued: "Defined ambition is not going to be for everyone, and millions of people are going to be automatically put into a DC pension, many for the first time. It is important that we do not get distracted from the task of getting good value for money out of the DC pension model. We need to improve transparency around charges and explore economies of scale."