Would you save more if your pension pot was guaranteed?

If your employer could guarantee the size of the pension pot you would receive in retirement would you save more?

I'd wager that most workers would save more because everyone loves a guarantee. This is the system, called 'cash balance pensions', that they use in the US and some pension experts believe we need to import it to the UK.

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Pensions minister Steve Webb has already started to change the pension rules to encourage 'risk sharing' in workplace pensions to try and rebalance the risk taken by employers and employees. In the past 'defined benefit' (DB) pensions that paid out a set retirement income for life put all the risk on the employer and it is unsurprising they died out. The shift has been to 'defined contribution' (DC) pensions where the employee receives a pension pot on retirement that is determined by how much they pay in and how well their investments do.
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This see-sawing from DB to DC has meant interest in pensions has waned, and workers can be forgiven for failing to be enticed by a system that means you have to lock your money away for decades with no idea of what you'll get at the end.

Cash balance

Now the government is keen to find a balance again and pensions expert Steve Bee believes a cash balance system is the fairest way to share the risk. Instead of companies shouldering the extremely costly burden of paying an income for life to retired employers, as with DB, and instead they would be obliged to provide a guaranteed pot of money as long as workers kept up contributions at a certain level.

Although companies would have to run the risk of the stockmarket when investing the money in order to provide a guaranteed lump sum, this is far less onerous on balance sheets than paying an income for goodness knows how many years.

For individuals who keep their side of the bargain they would receive a set amount without having to make investment decisions about their money – which many people don't want to do.

The government is forcing us all to save more through auto-enrolment, so it would be nice if the 'semi-compulsory' system promised us all something in return. By encouraging, or maybe even forcing, employers to shoulder some of that burden again the government will move more quickly towards its target of getting us all saving for our old age.

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