Pension Payouts Could Rise 30%

Pensions minister Steve Webb advocates a shared-risk, higher-return pensions system modelled on the Dutch retirement savings plan

Emma Wall 27 January, 2014 | 2:55PM
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Pension payouts could be boosted by up to a third under new proposals from the pensions minister Steve Webb. The Government has been running a consultation on ‘Collective Defined Contribution’ schemes which share investment risks – and costs – across a group of investors. The schemes are run like with-profits funds, and would allow investors to stay invested in higher risk assets as they approach retirement. Instead of your retirement income being paid out of a personal pension pot that you accrued, funds are pooled with those of other pension savers and retirement income is paid out of this pooled pot. These CDC schemes are popular in Holland and Denmark.

The schemes would be lower cost than current defined contribution schemes – but there are more complicated risks involved. Unlike an annuity, which guarantees a stable retirement income, income from collective schemes could vary year on year dependent on how the underlying investments performed.

A study last year by the RSA, based on modelling by Aon Hewitt, predicted how CSC schemes would have performed over the past 57 years and found that collective schemes would result in retirement income rising by 33% - and providing more predictable outcomes. However, this has since been contested by insurer Aviva – and the schemes have had teething issues in Holland where certain providers have cut payouts.

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Emma Wall  is former Senior International Editor for Morningstar

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