The government has today published a consultation on 'guided retirement', jointly with the FCA and the Pensions Regulator, on how default pensions should work in practice.
Over the last 30 years, the vast majority of private sector Defined Benefit (DB) pension schemes, that once provided an inflation-protected income for life in retirement, have closed.
The government notes that automatic enrolment "got private sector workers saving", but says the vast majority are saving into Defined Contribution (DC) pensions and are left "entering retirement with a savings pot rather than a route to a genuine pension that provides a secure income that lasts throughout their later life".
As part of its 'guided retirement' plans, the government says it is "now acting to resurrect the option of genuine pensions for all private sector workers". The consultation outlines how private sector workers can enjoy a pension that lasts throughout retirement, "something public sector workers take for granted".
Guided retirement aims to bring back pensions that pay an income, often inflation protected, for the entirety of retirement.
As part of the proposals, DC savers will be given a new option, offering many of the benefits of DB pensions, with introduction of retirement collective pensions.
Pension schemes will be required to provide a default pension for savers approaching retirement that protects people from the risk of outliving their savings. After years of saving into a DC pension, savers will have the option of a stable income for the rest of their lives.
Retirement collective pension schemes (RCPS) pool risk to deliver stability and growth and provide a fully managed pension people can rely on for life.
As part of its consultation, the government notes that for savers who want a different option, "they will always be free to choose".
Minister for Pensions, Torsten Bell MP, commented: “Private sector workers deserve a much better deal when it comes to pensions. They are doing the right thing and saving for retirement, but when they get there too many are left without a genuine pension.
"We are resurrecting proper pensions for private sectors workers, guaranteeing them the option of an income that last throughout retirement and in many cases protection against the rising cost of living - things public sector workers take for granted.
"We are going to give pensions back to the people who are working hard and saving for their retirement.”
Madalena Cain, deputy chair of the SPP’s DC Committee and member of the DWP Guided Retirement Delivery Group, said: “Pleasingly, the government has already engaged considerably with the pensions industry on guided retirement. The consultation launched today is the next step in that engagement process and ensures that everyone has an opportunity to highlight potential challenges, offer solutions and help ensure DC pension savers can convert their savings into a sustainable retirement income without having to make complex financial decisions at and throughout retirement.”
Laura Mason, CEO of retail at L&G, commented: “We welcome the government's focus on helping more people turn their pension savings into a sustainable retirement income. There is no one-size-fits-all solution, and Guided Retirement needs to combine greater support with flexibility and choice.
“A retirement collective pension scheme – or Collective Defined Contribution scheme - could be a valuable part of that landscape, but it is one option rather than a predetermined default. By pooling longevity risk and managing investments collectively, it has the potential to deliver higher expected incomes while taking complex decisions out of people's hands.
“But higher expected income isn't free. CDC involves investment risk and, unlike an annuity, income isn't guaranteed. The goal is to help each member find the right balance for them between income, flexibility and certainty."
Steve Webb, LCP partner and former pensions minister, added: “The government is right to say that managing a DC pot in retirement through the ups and downs of markets, and with no idea how long the pot needs to last, is challenging. So the basic idea of ‘guided retirement’ is welcome. But there is a danger that the government’s hostility to pension freedoms will lead them to promote ‘lifetime income’ solutions too heavily.
"If people want a secure income for life, the option of buying an annuity has always been there, but very few people freely choose it.
"Many people will have a good level of secure income – especially in the case of a couple with two full state pensions and some other pension income – and may prefer the flexibility to take their DC pot in ‘chunks’ as needed, rather than spread thinly through the decades of retirement. This is likely to be true of homeowners in particular, who show a preference for ‘front loading’ their spending to earlier in retirement. It is vital that the focus on retirement income does not destroy ‘freedom and choice’ in pensions which have been popular with savers and given valuable flexibility to hundreds of thousands of people in the last decade.”
