Minister urges companies to offer 'defined ambition' pensions

Steve Webb will push for adoption of Dutch-style schemes that aim to offer more assurance than 'defined contribution' pensions about size of retirement payouts
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Pensions minister Steve Webb
Pensions minister Steve Webb: ‘I would rather know roughly what I was going to get than have no idea what I was going to get.’ Photograph: Martin Argles for the Guardian

Ministers will encourage companies to offer a new Dutch-style pension to their employees, under urgent reforms sparked by the rapid disappearance of final salary schemes and the increasing number of people failing to save for their retirement.

Oil giant Shell became the last of the FTSE 100 companies to close its "defined benefit" final salary scheme last month and two out of three people in the private sector now fail to save at all. If they offer anything, employers now tend to provide inferior "defined contribution" schemes for their staff, that offer no assurances about how much the pension will finally pay out.

In response to the crisis, pensions minister Steve Webb has told the Observer he now wants to push companies into a new type of pension known as a "defined ambition" scheme, currently being pioneered in Holland, which offers savers some reassurance from their employers on the size of their pension pot and even the rough size of their income on retirement.

However, they would not be regulated by the state to the same extent as final salary schemes, so the employer would have greater flexibility in the event of fluctuations on the stock market or an increases in life expectancy.

Webb said that, in view of the uncertain and globalised economic climate, "any certainty, any promise, any indication [on pensions] will be increasingly valuable in years to come".

Around two million people belong to final salary schemes – where employees receive a pension commensurate to a portion of their salary on retirement – compared with a peak of eight million in the late 1960s.

And one in 10 of those due to retire this year will delay taking their pension, as a combination of plummeting annuity rates and poor investment returns means thousands who have put money into defined contribution schemes cannot afford to stop work.

A third of those delaying their retirement, according to Prudential, say it is because they are not ready to quit work, and a large majority say they have been forced into this position.

Twenty years ago, a 65-year-old man retiring with a £100,000 pension fund would have been able to secure a guaranteed income of over £15,000 a year. Today, with annuity rates at less than 6%, the same pension fund buys less than £6,000 a year.

Webb said he hoped future pensioners could be offered more assurances by employers so that their comfort in old age would not be entirely at the whim of the markets. "A generation ago when you worked for a firm, they provided a final salary pension and all the uncertainty was taken away from you as an individual and placed on the firm. Now there is a risk that pensions swing completely to the other end, the other extreme. So we have the 'defined contribution' pensions, which are a pot of money and the end of the firm's responsibilty is that they put the money in. And if the investments don't do well, that's your risk. If people live longer so the annuity rates fall, that's your risk. Inflation higher than thought, that's your risk. In a way, it is almost the secret of the pensions world that we are swinging from one extreme to another.

"It is difficult territory, because we are saying we will create a framework for something that feels less good than what people got a generation ago, but it could be better than what they might otherwise get."

Webb said "defined ambition" could mean a company saying: "We are aiming for a pension of this sort, it will be in this range, we can't give you an absolute guarantee but this is how we are going to get this pension. And we will report back on how we are doing and we might have to tweak, but this is what we are aiming for."

He added: "I would rather know roughly what I was going to get than have no idea what I was going to get."

Meanwhile the government will start an auto-enrolment scheme in October that will see 10 million people automatically put into a defined contribution scheme if they are not already in a company pension and earning more than £7,475 a year.

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