LONDON Jan 27 The British government is
considering a pensions shake-up that it says could make
retirees' lives better but critics see as a risky option that
might leave them worse off when financial markets go down.
The Department for Work and Pensions said on Monday it might
scrap the current system of moving individuals' savings into
safer investments such as bonds as they approach retirement and
offer "collective defined contribution" (CDC) schemes instead.
CDC schemes, which pool individual contributions into a fund
that could stay in riskier investments with higher potential
returns such as shares, could provide better payouts at a time
when pensioners suffer from very low incomes.
One in five people who retired in 2013 will live out their
retirement below the poverty line, according to a report last
week by think tank Policy Exchange.
"This is the one model that we think could provide employees
with greater stability," a Department for Work and Pensions
spokeswoman told Reuters, referring to the CDC scheme.
But Tom McPhail, pensions research head at investment firm
Hargreaves Lansdown, noted that this option could leave retirees
to endure lean years when the markets fall.
"Such schemes can go down as well as up," he said. "They are
complex, uncertain, unproven and rely on a constant flow of new
members for their long-term sustainability."
Pensions Minister Steve Webb has floated the idea of
bringing in CDC schemes on previous occasions, as part of his
wide-reaching "defined ambition" pension reform programme.
MIXED RESULTS ABROAD
Individual UK pension accounts are now moved into safer
asset classes such as bonds as their savers grow older and grow
less tolerant of risk as they near retirement.
Younger workers' savings are typically invested in riskier
assets with greater potential for growth such as equities
because they are regarded as far enough away from retirement to
recoup losses over time if markets crash.
Pooled pension funds have had mixed track records in Denmark
and the Netherlands, where they exist already. Some there may
have to cut payouts by up to 2 percent this year because of low
returns on investments and members living longer than expected.
In Britain, pooled pensions are one of several new plans
proposed to address the disappearance of final salary pension
schemes and encourage more people to save for retirement.
Critics of CDC schemes say they are risky and could give
rise to "intergenerational unfairness", with younger workers
taking on the risk that investments do worse than expected. The
last Labour government considered introducing CDC schemes but
finally rejected the idea.
McPhail suggested a link between the proposals and Britain's
next general election due in May 2015.
"Claims to be able to boost pension payouts at no additional
cost or risk are always going to prove popular, particularly in
the run up to a general election," said McPhail.