In a massive change to the way private sector pensions work, employers and employees could share the risks involved in saving for and paying out a pension.
Currently either the employer takes all the risks when offering a final salary (defined benefit) scheme (they have to pay out whatever); or the employee shoulders them all with a defined contribution pension (they have no guarantees at all).
Under proposals for a ‘defined ambition’ pension both employer and worker take a share of the risks.
The Telegraph reports that in future workers could be offered either a guaranteed pot on retirement or maybe a fixed income if they agree to work longer.
But of course any such changes would probably not last far beyond a general election or two. And as most workers see several changes in governments and swings from right to what is now just a bit less on the right, what we will really be seeing is more of a ‘defined ambiguity’ pension.
And if there is a sudden lurch back to the left can you see a socialist chancellor keeping their hands off of them? Gordon Brown couldn’t.
The government has to strike a balance. It needs people to earn and spend now so they can be taxed as much as possible, but it also wants them to be encouraged to save for their futures so that they are less of a burden on the state when they grow older.
But how can anyone know what that burden might be with these defined ambiguity type pensions in place? At least we know what the public and defined benefit private pensions are likely to be paying out in years to come.
We all need some sort of certainty, including government actuaries one imagines.
I would speculate also that the vast majority of workers would prefer to have a much reduced defined benefit arrangement in place than any form of pension that could fluctuate at the whim of the markets. Not only that but defined benefit schemes are ‘fairer’ in that everyone knows what they and workers like them are getting, or very likely to get. It also makes job comparisons far easier.
Defined benefit schemes did not fail because they suddenly became unaffordable. All that happened was they failed the stresses of over ambitious governments with a bottomless appetite for debt as well as mathematical geniuses in banks more intent on magicking money out of thin air for their own pension pots rather than supporting a stable financial system.
The pension industry just needs to be properly regulated with as little government intervention as possible and the funds protected from Maxwell type employers, overcharged fees and greedy chancellors alike. The pension pots should also be encouraged to grow so that size becomes their protection against future economic downturns as well as being then able to gradually enhance the benefits to retirees.
Then maybe we would see the gradual but welcome return of the certainty of defined benefit schemes.