Webb pushes for hybrid 'defined aspiration' pensions

What about honouring the Conservatives' pre-election manifesto pledge to put right all the damage done to the pensions framework inflicted by successive governments over the past 25 years? What about a meaningful alternative to the annuity trap? What about scrapping the punitive 55% death tax on unspent retirement funds (1.375 x the current rate of IHT with no NRB)? What about some USEFUL new ideas that people might actually want instead of specious guff like this?

Some people have said that Webb appears to be well informed about the issues in need of attention but, if he's putting forward no meaningful measures to address them, what's the flipping point?

I promise to pay you £10k per annum when you retire.

Maybe.

If I can't I won't.

Not much certainty there!

Hybrid schemes are nothing new. The problem is anything that provides a guaranteed pension needs to be funded and you end up with Actuaries and regulation and a final salary scheme by another name, only with double the complexity because you have a money purchase scheme and a final salary scheme rolled into one .

Very light on the detail of how this would be achieved!!!

What, like a targetted money purchase scheme maybe......is this such a "new" idea?

And while we all have "aspirations"" most of them are a pipedream - rather I suspect like a "workplace pension which will provide greater certainty whilst guaranteeing nothing".......I'm not quite clear on exactly how that drives things forward than from where we are now.

'Defined aspiration'? What does this mean? This will come with a long list of conditions that will have to be met to achieve the 'aspiration'.

I had a lot of time for Steve Webb initially - he seemed to have a reasonable grasp of a fair pension system, but I think he's losing the plot with vague tosh like this. Expect the word 'synergy' to appear very soon.

This follows on from his suggestion that he might consider removing the requirement for DB schemes to uprate pensions in payment, in the belief this would give them the "flexibility to innovate".

I'd like to see him trying to get the public sector to buy into a 'defined aspiration' scheme.

The great thing about a defined benefit scheme was that it defined a benefit, generally in relation to salary. The weakness was that definition only applied if you stayed with your employing company for 40 years. Leave early and the benefit was not quite what it is purported to be, being badly eroded by inflation. A quick tweak and it was back to being a defined benefit and people had a decent idea of what they were getting at retirement, without having to worry about the investment and annuity markets. The Pension scheme carried all the responsibility.

Defined contribution is a 180 degree turn. Nothing is known, other than the amount contributed annually. The pension holder carries the responsibility, having to monitor the investment and the annuity market.

A one stage, in the IRA era, policies carried an annuity underpin, so there was a notional degree of certainty. But many providers caught a cold on that because Governments started to control the level of inflation, and therefore interest rates. Additionally Government started to provide medical cover for people, and thereby extended their lives. In both cases this has had a negative effect on annuity rates. I'm not sure whether this is a valid argument for eliminating Governments, or for asking them to take responsibility for their actions.

Again going back to the IRA era there was a wonderfully boring product called a With Profits fund. Having been in existence for some 150 years it had produced decent returns year on year. So again people had a degree of certainty in their anticipation. Then in the mid 1980s actuaries panicked at the unitised upstarts, promised the impossible, and endowments effectly died.

So now we have a era in which continuous intervention by Government has made the Corporate underpin too large to sustain; and continuous intervention by Government has made the money purchase option extremely risky.

Despite the rhetoric NEST will be an extremely risky investment option. Considering that this is targeted at the lowest levels of earners, I find this morally very questionable when it is all but compulsory. And the fund choices that are being put together make no sense at all other than to a middle class elite too involved in their own sanctimonious do-gooding. All the information indicates that the vast majority of lower income people do not switch between funds and have little knowledge of investment management. So a decent middle of the road managed fund is likely to be the prime choice. (I'm not sure there is that choice in NEST.)

This allows us to take our thinking back to the 1970s, to underpinned annuities and with profit policies. To a degree of certainty.

An absolute guarantee of return is probably not a workable option, but a guaranteed bottom line, at an appropriate and sustainable level could be a workable option.

People might question the cost to the Government of such an arrangement, but they need to balance this with the knowledge that insufficient take up of basic pension saving is likely to cost the country even more.

The psychology of guaranteed minimum returns alone could be a major factor in changing the future.

Currently people do not want to invest in pensions because everybody is stating that they are high risk and poor value for money. Remove some of that perception of risk, and some of that perception of cost and there may be a change in people's attitudes to pension saving. This could encourage people to go beyond saving the minimum level.

Steve Webb, like any politician, is long on words and short on practical solutions. History does give us valuable lessons, so why don't we use them.

Mr Webb;

'Defined Aspiration' pensions already exisits for those savers who have 'bought-in' to the idea of providing something over and above statepension and means tested benefits when they retire Mr Webb.

Its called Targetted Retirement planning, and incredibly simple....(and sits well with a bog standard Personal Pension).

very simple process;

Ask Mr client what do you want as an income when you retire? --The magical 'Aspiration' ....

Mr Clients says well approx £ X , per annum in todays money....

''Ok, well based on what you have currently, and your retirement date is Y years away, and we assume 6% per annum growth, you need to pay

£ Z per month and index link Z by say 3% per anum to fight inflation"

that should build a pot sufficient to provide you with your Aspiration at retirement

''We'll keep a check on it each year, to ensure you are on track'' Easy eh?

that's as close as we can get you to realising your Aspirations, and I'm afraid that's as close as you'll get to any guarnatee, or underpin.

- Unless of course you land a job as an MP , or better still a Euro MP, and then you're pretty much home and hosed already..

Thinking about it, this sounds a bit like target funding which, I believe, Scottish Life tried to promote some years ago ~ but, if the target is a fund of which 75% will have to be applied to buy an annuity or some other retirement income product shackled to GAD annuity rates, how many people are likely to embrace the idea?

Amongst much else, the single biggest deterrent to making any sort of commitment to building up a restricted-application pension fund is the annuity trap. Any proposals that fail to tackle this are just distractions. I cannot believe that any reasonably intelligent government minister is unaware of this. The only reason he would talk about anything else must be because he's been instructed by the Treasury to stay away from the annuity issue because if the annuity trap were to be scrapped, then all of a sudden NOBODY would buy an annuity and that could have serious repercussions for the government's finances as a result of a drastic fall in demand for Gilts. Hence my scorn for Mr Webb's apparent understanding and appreciation of the issues at hand ~ it's all just talk, talk, talk about anything and everything but the core issue. If he had any real integrity, he'd stand up and say that he's very much aware of what REALLY needs to be done but his hands have been tied by the government. The genie would be out of the bottle and, no matter how hard it tried, the government wouldn't be able to put it back. That, in my book, would make Steve Webb something of a hero to the pensions industry instead of what I see him as at present.

I thinks it's a great idea and that they should roll it out by first converting the MP and FSA DB schemes on to a "defined aspiration" basis. That way, they can be a shining beacon on how the nation can attain their pension aspirations.

If you all join hands and go down to the waters edge you may just be able to stop the tide coming in which I guess might just put a hint of a smile on your faces although I doubt it very much..