PENSIONS BOOST FOR MILLIONS
Radical reforms in saving for retirement could see incomes rise 7% a year
A REVOLUTIONARY pensions shake-up that could boost retirement incomes by up to seven per cent a year will be given the go-ahead today.
Dutch-style retirement plans that offer people less risk over their savings will be set out in the Commons by Work and Pensions Secretary Amber Rudd.
The new scheme is being pioneered in the UK by Royal Mail and is expected to be opened up later to millions of workers in other industries.
Ms Rudd said the changes are a key part of the “highly successful” world-leading pensions systems in the Netherlands and Denmark and could “transform the UK private pensions landscape”.
She said: “Introducing a completely new pension
scheme to the market is yet another revolutionary reform in this Government’s quest to transform the retirement saving culture in this country.
“These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators.
“The new type of pension is currently used in Denmark and the Netherlands – two countries widely recognised as having among the best pension systems in the world.
“Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industries to enhance the prospects of millions of workers.”
Gold-plated final salary pensions are in decline as employers struggle to deal with massive deficits in such schemes.
Saving through individual defined contribution pots is growing, but investors shoulder some of the risks and have no certainty about their retirement income.
Choices
They also have to make major choices about how to take their money on retirement, such as whether to buy a costly annuity that will provide a guaranteed income or effectively having to work out their life expectancy if they opt to draw down payments from their individual pension pot.
The new Collective Defined Contribution scheme is seen as a “middle ground” as members share the dangers by putting their money into one fund rather than individual pots.
It means the investment, inflation and longevity risks that hit pension schemes are shared across the members instead of by an individual.
It could lead to a bigger retirement income for the same cost. Savers are also unaffected if their employer goes bust, unlike those in final salary schemes. But economic changes can mean payments are cut or contributions are increased and the Government said that members will need to be warned their monthly pension will fluctuate in value.
The Commons Work and Pensions Committee found CDCs allow companies to offer good pensions to their staff without the risk of large long-term pension liabilities on their balance sheets, while workers are given a regular income in retirement. It said several studies had found the schemes can offer more generous and predictable benefits than individual defined contribution provisions.
Savers could be better off by up to seven per cent a year, according to its analysis.
Ms Rudd signed off plans for Britain’s first CDC after Royal Mail, backed by the Communication Workers Union, drew up proposals for its 142,000-strong workforce. The new type of pension could eventually be opened up to allow schemes to be set up across a number of employers.
Jon Millidge, Royal Mail’s chief risk and governance officer, said: “This is very welcome progress. Royal Mail and CWU have been campaigning together to bring about this legislation, building a cross-party alliance of supporters in both Houses of Parliament, as well as working with the Government. We now
look ahead to the next stage and, ultimately, delivering the UK’s first CDC pension.”
Ms Rudd said there are some risks with the new type of pension plan and that she will “keep a close eye” on how the Royal Mail scheme operates before rolling it out more widely.
Innovation
Terry Pullinger, CWU deputy general secretary (postal), said: “The response to the consultation on these proposals, and the degree of support from many key players, confirms our belief that the pensions industry is in genuine need of scheme innovation.
“We are very proud and ready to be at the forefront of this historic moment which we believe will make a major contribution to offering future dignity and security in retirement for decent working people.”
AWORRY-FREE retirement should be the least you can look forward to after working hard all your life. Sadly, our state pension ranks poorly for a developed country and private pensions rarely produce the incomes we hope our investments will achieve.
Too many Britons approach the end of their working lives with a sense of dread over whether they have put aside enough savings to keep them comfortable.
So anything that boosts personal pension income is worthy of attention.
The Government will today give the go-ahead to collective contribution schemes which are popular in the Netherlands and Denmark and which will be pioneered here by Royal Mail’s 142,000 staff.
By allowing groups of workers to “go Dutch” and pool their pension pots, rather than investing as individuals, they could spread risk and cut costs and red-tape.
It could raise retirement incomes, with more certainty and regular pay-outs, says Work and Pensions Secretary Amber Rudd, who writes exclusively for us today.
Of course, the new schemes are not without risk, and at the time they were first mooted here five years ago, some critics in the Netherlands were all for swapping to UK-style annuity pensions.
The pilot scheme will need to be studied carefully, but pensioners deserve better than they get at the moment.