New pension ideas "full of holes"

Britain needs new-style pensions which cut costs for employers but provide workers with guarantees on the retirement income they're likely to get, according to a discussion paper from the Department for Work and Pensions.

It suggests that companies which have offered generous salary-linked schemes might cut out annual inflation increases for future members, remove benefits for spouses, or limit pensions for employees who leave for a job somewhere else.

On the other hand, employers who provide the most basic schemes, which provide no promise of a particular level of pension income, could look at confidence-building improvements. They could guarantee that members would at least get their contributions back or guarantee a level of return, in exchange for a fee.

From this autumn, the government is forcing companies to enrol staff in workplace pensions, but the Pensions Minister, Steve Webb, said people's trust in the system needed to be restored so they don't opt out and they "get the most out of what they put in".

But one leading pension consultant who has looked at the ideas commented that they are "full of holes".

John Ralfe said there was "no magic money tree and no fantastic solutions". 

In his view the paper misleads people by suggesting they can buy a guarantee for their savings returns and that this guarantee would cost very little. 

Companies, also, would baulk at the cost of providing any extra guarantees.

He added that people had to reconcile themselves to working longer, retiring later and saving more.

Putting your feet up later

Which makes most difference: making you pay more into a pension, making you wait before you can take it or giving you measly increases?

With thanks to the pensions consultant John Ralfe, here is a closer look at the impact of Lord Hutton's recommendations for nurses, teachers and other public sector workers and their pensions.

Keep this big number in mind: £30bn.

It is the is the amount of unfunded public sector pension costs which build up each year, adding to the long term bill for the taxpayer. The official figure is £14bn but that is widely regarded as an underestimate.

This is reduced by:

£6bn from the switch to the meaner CPI measure of inflation from RPI to calculate annual pensions increases, implemented this year and unrelated to Hutton.

£6bn from aligning the normal age for taking a public sector pension (still 60 for many) with state pension age (rising to 66 in 2020, then to 68).

£3bn from making public sector workers pay another 3% of wages into their pension schemes.

£2bn from no longer offering Final Salary Schemes and providing Career Average pensions in future.

So the loudly fanfared switch to Career Average pensions has the least impact. The most significant Hutton reform by far, according to these figures, would be the tactic of keeping people in work longer.

Of course, it makes sense. Imagine someone who retires at 60, expecting at least 25 years on a pension. Take 5 or 6 years off that and you see a 20% reduction in the number of years the pension is paid. And there'll be another few years of contributions.