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Government sets out 'third way' plan for workers' pensions

Pensions minister Steve Webb has outlined his plan for a new breed of 'defined ambition' pension schemes.


by Michelle McGagh on Nov 23, 2012 at 09:00

Government sets out 'third way' plan for workers' pensions

The government has set out plans for a third way for company pensions that would guarantee employees’ money while limiting the risk for employers.

Currently so-called 'workplace' pensions are one of two types, either defined contribution (DC) or defined benefit (DB). The former puts the risk on the employee because the pension payout is determined by how much is saved and how much it grows, whereas the latter puts the risk on the employer because DB schemes pay out a set amount based on a multiple of years worked and final salary at retirement.

It is no surprise that DB schemes are in short supply as they are just too expensive for companies to run as people are living longer. However, employees are not saving enough into DC schemes so the government has outlined a compromise – the ‘defined ambition (DA)’ pension which splits the risk between employees and employers.

In a consultation paper, Reinvigorating Pensions, the Department for Work and Pensions (DWP) discusses the possible structure of defined ambition pensions. They could either be seen as ‘slimmed down’ DB pensions or beefed up DC pensions with added guarantees.

A slimmed down DB scheme could include a ‘core guaranteed benefit’ with additional benefits like inflation indexation – dependent on investment performance. While the core of the benefits would be protected the rest of the pension would come under a lighter funding regime.

A member of a DB scheme could also have their pension converted into a DC cash sum when the member leaves, retires or dies.

A slimmed down DB scheme would also see the retirement age linked to state retirement age so although the member would have some guarantee of what they would receive in retirement, they may find their retirement date increases.

Alternatively, looking at defined ambition pensions from a DC perspective could include a ‘money back’ guarantee to safeguard contributions and ensure that poor investment choices do not mean that pension savers end up with less than they contributed.

There could also be guarantees to cover the later years of retirement to ensure people do not run out of money, and guarantees for levels of fund growth provided by insurers.

A guaranteed retirement income could also be bought with part of the pension fund, again to ensure a certain level of benefit in old age.

The report, which was instigated by pensions minister Steve Webb, said: ‘We are seeking to achieve a fundamental shift in the culture and attitude of working age people in this country towards pensions. We recognise that this will take time – trust in pensions is low.

‘Individuals need to take responsibility for saving some of the money they currently earn for their retirement. We need employers to support them in this.’

The report also said: ‘Those that remain in workplace pensions need to be confident that they are saving in quality schemes that provide them with value for money…We are working closely with the industry to explore the scope for defined ambition schemes that share some of the risk and give people more confidence.’

On paper, the defined ambition pension sounds like the perfect solution but experts warn that it won’t be easy to implement.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: ‘The government can’t just wave a magic wand and expect the industry to conjure up transparent, low-cost, secure, guaranteed investment providing a good rate of return. If it was easy, then the industry would be doing it already.

‘In the meantime we believe that much more can be achieved by engaging investors in a sensible on-going dialogue around how much they are saving, where the money is invested, how it is performing, when they might be able to afford to retire and how they can draw their income,’ he added.

15 comments so far. Why not have your say?

Keith Cobby

Nov 23, 2012 at 09:25

These initiatives are coming thick and fast from Steve Webb. Another eye-catching proposal to add to the complexity of pensions.

As complexity increases, interest decreases. If tax relief is reduced to the basic rate interest will evaporate and then perhaps we can start again. My solution is to enhance the ISA with some matched funding or tax relief.

The big problem with all these Government proposals is that people must be certain of how they can draw their money out and at what age. If they can be changed on the whim of a new Government who will invest?

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Anonymous 1 needed this 'off the record'

Nov 23, 2012 at 16:27

Steve Webb should stop this tinkering and get on with his promise to make sure that "it pays to save". Auto-enrolment, which has now already been going on for nearly 2 months, ensures that it does NOT pay to save, whilever the Pension Credit continues to exist.

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Nov 23, 2012 at 16:55

More random ideas on the injured pensions beast !

Why doesn't HMG Work & Pensions Dept, come up with a cohesive

thought out masterplan to make pensions desirable for the majority?

Far better than these sticky plasters that they keep putting on the

poor animal!

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Nov 23, 2012 at 17:50

Could this be the start of a 'compromise' for public sector pensions to head-off the militants?

The private sector has already closed most DB schemes and are likely to claim they cannot afford to fund such a scheme. Whereas the public sector needs something which will give the illusion of reducing costs to the State, yet still offer a nice safe cushion for those who don't understand what it's like to save, risk, and then lose out after 35 years.

Of course, unlikely to be of any help to those of us already suffering in reduced Drawdown circumstances.

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Anonymous 2 needed this 'off the record'

Nov 23, 2012 at 18:00

I have a small (short earning period, and not a high pay rate) DB pension.

I did ask about having the pension value paid over to my new employers DC fund.

The offer I got, and remember pension is not part of your employment contract, would have added enough to the DC fund, according to the annuity rates offered back then) to have brought me an annuity to the amount of half the DB benefit, and the DB pension was (government finangled) 'inflation proofed' .

So - unless the minister will, well can and will) Guarantee that the government will require, and enforce transfer amounts from a DB fund into a DC fund to be enough to get the equivalent income from the DC fund as was expected/due from the DB fund, then . . .

And that Guarantee will need to be an all party one - backed by ?? in case neither Lab, lib or the Con party get in, otherwise . . .

And - those paying into a pension fund will also need similar consideration of the charges made to setup, pay-into, and take from the pension fund, as well as being allowed to use the capital, rather than GAD limits meaning the capital is retained in the fund for the (current) 55% tax before the remainung 45% goes on to be considered for the (currently only) 40% estate duty tax.

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Jane Davies

Nov 23, 2012 at 20:10

Steve Webb clearly hasn't got enough to do so has to tinker with a system that's already bogged down and is so complicated it wastes millions of taxpayers money in paying DWP employees trying to sort it out. Maybe he could spend some of his time addressing the injustice of the frozen state pensions. An easy one to rectify, just pay the 4% who suffer from this disgraceful discrimination what they have paid for over a lifetime of working and paying NI. An example of this theft is a war veteran aged 92 who has had his pension frozen since 1985 and is getting £17 a week when by rights he should be getting more than £100 a week. A situation Webb promised to end, a policy so unfair he tabled an EDM not so long ago to right this wrong. Of course he was in opposition then, it's easy Steve, just do it and stop cheating 500,000 state pensioners their cost of living increases.

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George Morley

Nov 23, 2012 at 21:50

As has been said by others, Steve Webb comes up with new ideas and one wonders why when he has no clue how to fix existing ones. To just keep adding more confusion to the already out of control schemes has to be more expensive to implement. I see Jane Davies has mentioned the frozen pensioners and that is a classic example of how bad management by successive government pensions ministers can get it screwed up and if he is so good, then why does he not fix it and do away with the discrimination that this policy certainly has. It is beyond belief that ministers do not have the will, moral fortitude to put it right for once and for all but maybe it's a lack of ability.

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Nov 24, 2012 at 02:09

Steve Webb stated that the Pensions situation in the UK was "so complicated that even Einstein would be baffled by it". Understandably therefore, rather than actually get to grips with it and sorting out the anomalies in the current system he thinks that introducing yet another "baffling" pension scheme will placate everyone!

No Steve, it does not work like are behaving like the coach driver who, because his old bus needs an overhaul, thinks it better to take more money off his later passengers to buy a new one and bugger those left on the old one! To you eternal shame chief among those being ignored are the frozen pensioners

It is time you and Iain Duncan Smith came out from behind those pitiful excuses like "it is a long standing policy" or " there is no reciprocal arrangement" or "we can't afford it" and recognised your responsibility to this most vulnerable group of your fellow UK citizens.

There is no legal, moral, financial or administrative reason for the continuation of this morally corrupt discrimination. It is not illegal to uprate world wide, it is not immoral to pay equal pensions to those who contributed equally; the NI Fund has a surplus of over £33 Billion and as basic pensions are currently payable world wide so, too, would be the uprate.

In these threads Webb has rightfully been accused of tinkering. Chelsea Football Club once had a manager who was always changing his team around...he was nicknamed "The Tinkerman"...he got for thought Mr. Cameron?

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Nov 24, 2012 at 09:56

I smell a rat - again! Mr Webb has so far managed to wreck the pensions of 60 million people in 1 stroke by his change from RPI to CPI, using the excuse that "we need to overcome The Deficit" The fact that "the Deficit" is supposed to be a short term problem, fundamentally changing pensions is a LONG TERM thing Mr Webb, and your change wrecks everyone's pensions in the short, medium and long term.

All the comments about this are very appropriate but the one sentence in the article that stands out for me is: "A member of a DB scheme could also have their pension converted into a DC cash sum when the member leaves, retires or dies." Ah ha, the cat is out of the bag: It's hard to think of a more effective pension-wrecking idea, so Mr Webb will definitely want this bit to fly. I'm afraid that I have got to the stage of knowing that anything this guy proposes is 100% certain to be destructive of peoples' pensions and standards of living, so nothingnhe suggests should be implemented.

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Anonymous 2 needed this 'off the record'

Nov 24, 2012 at 10:50



I suspect you have almost got it - like your name - not quite

?RaidthePension maybe

Bit - re got fired,

How much index linked pension does a Minister get for being in post a couple of weeks.

Having 'qualified' why stay when you can get more by moving?

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Nov 24, 2012 at 11:08

Sorry Anonymous 2 but I'm afraid your comments make no sense to me. Perhaps you might like to explain?

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Anonymous 2 needed this 'off the record'

Nov 24, 2012 at 11:26

Ministers get a Very-Nice pension funded from the Public purse.

As in


By Melissa Kite, Deputy Political Editor

9:05PM BST 03 Oct 2009

Official figures unearthed by the Liberal Democrats show that total pension funds for the members of the Government have shot up from the £6,888,081 declared last year to £8,954,348 this year.

The rises are understood to be largely the result of a change in accounting rules which means that the full value of ministers' pensions is being revealed for the first time.

The Chancellor, Alistair Darling now sits on a ministerial pension pot of £377,000, up from £256,000 declared last year.


But as we have seen on the BBC, News

There are far more lucrative posts out there for 'ex-ministers, -

Even the common man can pickup the half million for under 2 months in post.

I do note that may have a requirement that you do not do the job properly.

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Anonymous 2 needed this 'off the record'

Nov 24, 2012 at 11:36

More up-to-date


that starts

They're blithely asking public-sector workers (average pension: £5,600 a year) to sacrifice a chunk of their retirement earnings, but what will the coalition government's ministers have to get by on once they retire?

It's not the simplest of calculations: ministerial pensions are provided by the Supplementary Section of the Parliamentary Contributory Pension fund (SSPCPF), which unlike the basic MP's pension to which it is added – and which is calculated on final salary alone – is based on something called "revalued career average earnings"

and ends

Deputy PM Nick Clegg could count on £26,403 at retirement age if he leaves parliament at the next election, as could fresh-faced chief secretary to the Treasury Danny Alexander. Chancellor George Osborne would be on £32,977; business secretary Vince Cable on £39,551; and health secretary Andrew Lansley on £39,825. In other words, says Unite, a typical public-sector worker "would have to work three working lifetimes to earn Francis Maude's pension, and two to earn young Danny Alexander's".

Nice work if you can get it.

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Anonymous 1 needed this 'off the record'

Nov 26, 2012 at 10:24

The Pension Credit, oversimplified, is the most effective disincentive to saving ever devised. In essence, it provides a pension top-up on a means-tested basis, so that if you save any money anyplace but in a pension, you can spend it, and get the top-up. However, if you save in a pension, you can't get rid of the retirement income, and in the worst case you lose £1 Pension Credit for every £1 of private pension, and in the best case you lose about 40p Pension Credit for every £1 private pension.

The huge problem with auto-enrolment is that people are being put into little pension schemes where this terrible effect will be most pronounced.

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Justin Forawurd

Nov 27, 2012 at 02:47

Steve Webb is just adding to the house of cards with this latest gimmick. We all know that the more cards you add - the more the chance the house will collapse!! But if he used an honest and trustworthy foundation he might even pull it off.

But as others on this article have rightly pointed out, Mr Webb is neither honest or trustworthy!!

4% of the UK state pensioner's population whose pension is frozen until they die, is all the proof anyone needs NOT to believe any word he utters.

While in Opposition he swore to overturn this shameful piece of discriminatory British legislation. How is it that, once in power, and particularly now that he's a Minister of Pensions no less, he hasn't been able to find the time - or the conscience - to make good his many promises??

Mr Webb, try building a decent foundation first, by righting this disgraceful and fraudulent "frozen" situation - and then maybe the house of cards will hold together for you, because then people might start to believe what you say!!!

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