LONDON, Jan 27 (Reuters) - 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.
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.