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DWP sets out plans to overhaul workplace pensions

by Alex Steger on Nov 22, 2012 at 07:54

DWP sets out plans to overhaul workplace pensions

The government has proposed giving auto-enrolment pension schemes star ratings, to help employers pick the right scheme, and give employees and good deal.

The star system is one a of a series of plans outlined by the Department for Work and Pensions in a new paper aimed at overhauling the workplace pensions market called Reinvigorating Workplace Pensions.

The paper also proposes defined ambition (DA) pension schemes, a combination of defined benefit (DB) and defined contribution (DC) schemes.

Previously pushed by pensions minister Steve Webb (pictured) these schemes aim to give savers some guarantees about the size of their pot, but without the cost and risk for employers.

The government has proposed savers pay a levy in exchange for a guaranteed fixed income on retirement. The levy will lead to higher monthly contributions from workers but will give them a minimum income when they retire, even if the stock market falls, according to the Daily Telegraph.

Webb has not given up on DB schemes altogether though and has put forward the idea of ‘slimmed-down DB’, ‘where the future pension promise could be limited to a cash figure at retirement with any inflation-protection post-retirement conditional on the investment performance of the fund’.

Writing in the Telegraph, Webb said: ‘Alternatively, the pension promise could last only as long as you work for your current employer. When you leave, it crystallises into a cash value which you can take to a new pension scheme. This approach would be valued by firms who do not want to retain pension obligations for workers who have left them many decades earlier.’

He added: ‘Another option is enhanced DC. This could mean adding some form of ‘smoothing’ so that the pension outcome is much less uncertain than under pure DC. There is, of course, a cost to greater certainty. But our evidence is that people of all ages and all income levels value greater certainty about their retirement income.’

20 comments so far. Why not have your say?

Arthur Schopenhauer

Nov 22, 2012 at 08:22

If you want to know how this works look at Australia 1992 which introduced a 3% work place pension instead of pay rise. This % has changed over the years and is due to be 12% in 2012

By 2025 the earliest you can access this is age 60

Are there any other cut and paste examples that we could adopt instead of the constant state of rearrangement Pensions are long term plans and there needs to be certainty in legislation less meddling by well meaning politicians Say like their own wonderful scheme

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Nov 22, 2012 at 08:24

If they are going to give "star ratings", l hope they provide 'evidence of research', and have it available for inspection when the complaints come in.

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Philip Wise

Nov 22, 2012 at 08:39

Any chance of a link to the paper? Nothing on the DWP website that I can see

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Paul Howard via mobile

Nov 22, 2012 at 08:50

And just who will offer these 'guarantees'?

Either it will be the next mis-selling or next rescue required.

Why does no one understand realality? If it's too risky, no one will offer it. If it doesn't pay out, people will complain.

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John Burchett

Nov 22, 2012 at 08:53

I assume the hedging instrument will be the taxpayer.

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Smithling via mobile

Nov 22, 2012 at 09:05

Just make auto-enrolment compulsory for the employee as well as the employer. Job done

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Hugh Jars

Nov 22, 2012 at 09:07

''The government has proposed savers pay a levy in exchange for a guaranteed fixed income on retirement. The levy will lead to higher monthly contributions from workers but will give them a minimum income when they retire, even if the stock market falls''

I personally don't believe it is the answer, --clients accept the concept of risk....and used correctly will yield them potentially much more at retirement - particularly the younger 20 yr olds investing for 40 yrs.....

But, heh- politicians know best don't they?....

Have they thought through the possibility that the 'Guarantees' will be so low, that they will appear so unexciting, that it will simply lead to further apathy?... after all, you can guarantee (see I'm hooked on the phrase) that the guarantee will be set at something like 2% over BBR ( if you're lucky) so illustrations produced at the moment will display a fund, and therefore an income at retirement , (adjusted for inflation of course!) that will show a standard of living sadly way below today, so people will be left cold.....

never mind,

Bring on the Product Levvies ASAP.......sooner the better,- if the concept becomes popular then it will be easier to expand this into the wider market place, and convince the wretched FSA that this is the way to address the damned wretched inequality of the FSCS funding that is posing the greatest threat to my business.

RDR threat is last years news

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Chris F

Nov 22, 2012 at 09:07

I presume they will not be using any kind of past data in the ratings system - whether that be charges, fund performance and availability, service levels etc. as past performance is no guide to the future.

I wonder what they *will* use?

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Henry Tapper

Nov 22, 2012 at 09:23

Right in principle - especially the rating system. This could work

The detail surrounding guarantees looks like a pass the parcel exercise rather than a genuine attempt to tackle the problem of "whose risk is it anyway".

The debate has a long way to go but with so much money flowing into pensions from AE, it is unlikely to go away

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Nov 22, 2012 at 09:33

One of the joys of NMA is that one has the opportunity of starting the day with a good old "FFS" gasp.

Let me get this right; we are talking about:

DA schemes

Star ratings (by whom?)




Transfer values

Smoothed DC schemes

inflation protected pensions

And who, pray tell me, will be advising whom on all of this? Obviously whoever does will be paid for their advice (yeah, right); and what risks will employers be taking when selecting a star rated scheme?

I know, maybe all the information could be stuck on the MAS notice board ?

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Keith Cobby

Nov 22, 2012 at 09:43

Another day, another eye-catching initiative from Steve Webb! The Government don't seem to understand that the continual meddling with pensions is the biggest obstacle to their success.

Who will want to save for decades and have such uncertainty. I would like to see the focus for long term saving moved from pensions to an enhanced ISA product. For example some matched funding or tax relief. Steve Webb should look at the US 401k plans.

Young people need to be encouraged to build their own portfolio and keep their money as far as possible from Government interference.

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sol trader

Nov 22, 2012 at 09:48

Or, in other words - With Profits pensions for all.

Perhaps they would like to give Equitable Life another go as they never paid commission to advisers so they could afford to offer fantastic guarantees

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Mike Morley

Nov 22, 2012 at 10:13

@ sol trader - same thought process crossed my mind. Another ill conceived utterance from a Government that is rich in ideas and talk but bereft of executive ability and joined up thinking.

This looks like another plan to which at a later date, when it ends in disaster, we will see attached the cliche "Lessons have been learned"?

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Hugh Jars

Nov 22, 2012 at 10:14

Nice one Sol Trader,

One of the great pitches from the Equitable Life direct sales force was ''I don't get paid commission, which means the returns to you are much higher than other with profit offices'' ....'' My bonus?, car pension other benefits etc?" well the company pay that, it doesn't come out of your fund Mr client"

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Andrew Dickson

Nov 22, 2012 at 10:20

When the product is no longer the 5* product it was at the outset, who tells the consumer?

If it slips down the ranking shouldn't DWP tell them

If they do, will there then be constant switching from product to product by those without professional advice ?? Oh my goodness.....

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Nov 22, 2012 at 10:38

Mr Webb, think this thing through. Do not rely on some cockamame report provided by a junior in the DWP to cloud your judgement, this is a disaster waiting to happen.

Yes Mr Webb, I know you are under pressure from the insurance company lobby, the employers lobby and the electorate over auto enrolment. We were told it would be difficult to opt out, but a hell of a lot are opting out via an app on their mobile phone. Simples!

DA and smoothed DC require additional charges to the fund, something rejected by the Turner report as the impact to the pension would be too great.

Lord Turner wrecked proper workplace pensions in the 1990s, followed by political meddling with DB schemes making the decision makers unable to fully benefit, thus not promoting these excellent schemes. Now the EU will polish them off with Solvency 2. Why not reinstate the DB pension rules to those originally set up in the 1960s, No caps, limits, statutary increases, gender equalisation, RPI, employee trustees, forced investment et all. Just 1/60th max per annum and let the scheme define the contributions. Let the wealth creators and company directors get a wacking great pension from them, as long as the same benefits are available in proportion to all.employees. You never know, it may well work!

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Nov 22, 2012 at 11:24

Hahahaha I'm still laughing at Defined Ambition - the new buzz phrase after "committed" - you know, everyone these days is 'committed' to delivering something. I can hear it now -. "yes, well it was our ambition to deliver these guarantees but, well, you know how it is....."

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Nov 22, 2012 at 12:54

@sol trader.

Spot on - its as if Mr Webb has never heard of with-profits when he came up with this genius notion of smoothing.

Is "levy" another term for pension contribution? What if this pushes me over £40k?

Whole thing sounds absolute ar$e to be blunt.

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Paul Howard via mobile

Nov 22, 2012 at 13:22

That probably hits the nail on the head - a modern with profit fund.

I am sure several firms could design a fun which did say :

Guarantees the fund value at the NRD

Targets say a return of 1.5% per Annum over the rate of inflation, net of all charges - over a three year rolling timescale.

Provider has a specified charge of say 1.25% pa to pay for all charges, which includes a simplified advice charge of say 0.25%pa (basic advice) and the guarantee at NRD.

For low rIsk members it should provide an ideal solution to produce real returns at a fair cost. Commercially, the charge should be sufficient to make it worthwhile to do and for everyone to support it.


Now to resolve te annuity rate problem.

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Nov 22, 2012 at 15:15

After about 5 minutes, I've finally stopped rolling on the floor.

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