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Q&A: what is a 'defined ambition' pension scheme?
The government has set out plans for a new kind of company retirement scheme where employers and employees share the burden of pension saving.
by Michelle McGagh on Apr 11, 2012 at 00:01
Traditional final salary pensions have become unsustainable for companies – as people live longer and investment returns have fallen as interest rates have dwindled, companies are forced to pay out generous annual incomes they just can’t afford.
No companies in the FTSE 100 now run a final salary scheme for new employees since Shell closed its scheme to new members at the beginning of the year.
Many people are struggling to make the best of money purchase schemes. Not only do they have to take responsibility for their pension pot while they work, they also have to use the money to buy an annuity (which provides the pension income) when they retire. Workers have gone from having complete security over their pension to having none in the space of a few years, which is hardly encouraging them to save.
However, if the risk of a pension could be shared equally between employer and employee and some certainty given about what individuals will receive when they retire there is more incentive for people to save, ultimately easing the burden on the state.
What about the public sector?
A defined ambition scheme is a fair way to provide a decent pension for those working in the private sector. However, when compared to the defined benefit pensions offered to the public sector it is still inferior.
However, this is due to change and the coalition has already made clear that it plans to bring in changes to public sector pensions that were recommended in the Hutton Review.
Lord Hutton wants public sector workers to work for longer, contribute more if they earn over £15,000 a year and take a lower income in retirement.
Public sector workers will be moved to a career average pension scheme, which means that instead of receiving the equivalent of up to two-thirds of their salary in their last year at work they will receive a pension income based on two thirds of the average salary they earned during all their years at work.
The argument is that the private sector is being forced to contribute more and work longer for less retirement income, then so should the public sector, which the taxpayer funds.
What about auto-enrolment?
The announcement of a defined ambition pension is somewhat ill-timed as the government will this year auto-enrol millions of employees into workplace pensions if they are not currently saving into a pension.
Although the scheme is not compulsory people will have to be opt-out of the pension scheme if they do not want to contribute.
The government has also set up the National Employment Savings Trust (Nest) which employers that do not currently have a pension scheme can use as their employee pension scheme. Nest is essentially a money purchase scheme, so it would have been better to try and introduce a defined ambition option when auto-enrolling people into schemes.
More about this:
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