Government considers new pension schemes where risk burden is shared

The Momentum UK Team 10 April 2012

The government is considering introducing a new type of pension scheme that will aim to better distribute risk between employer and employee.

It is hoped that the new "defined ambition" pension plans will provide a viable alternative to the ailing final salary schemes that have become too expensive for many firms to sustain, and offer more security to those approaching retirement.

With the widespread closure of final salary pension schemes, many firms now only provide access to defined contribution schemes, where members' contributions are paid into investment funds. These funds can be difficult to predict across the long term because the success of such investments relies heavily on the performance of financial markets.

Speaking on the BBC Radio 4 Today programme, Pensions minister Steve Webb said said that the government is "looking to investigate options for a new model, the defined ambition model, where risks and uncertainties are more evenly shared between employer and employee.

"Firms would like to offer their employees some sort of certainty but without all the costs and burden they already face."

Webb went on:

"One example is the so-called 'cash balance' scheme, where the firm guarantees to deliver a fixed pension pot on retirement and the employee then bears the uncertainty as to how much pension that pot of money will buy.

"Another model is to share some of the uncertainties of rising life expectancies, so that firms pay a guaranteed pension but the date on which that pension is paid can change for future accruals if people live longer than expected.

"Or there could be new models where younger workers are told that their pension could lie somewhere within a wide range but as they get older they are given more and more certainty about what their final pension will be."