Saving schemes 'risk' under reforms

Coins in handMillions of workers will be exposed to "risky", hard-to-understand and outdated retirement saving schemes under the Government's landmark reforms, former Downing Street pensions adviser Ros Altmann has warned.

More than 1.6 million people have already been placed into pension schemes under the Government's automatic enrolment initiative, which is eventually expected to recruit around 11 million new pension savers as it rolls out over the next five years.
But in her report, Dr Altmann warned that: "The future for pensions is more complex and risky than ever before."

She called for an overhaul of defined contribution (DC) pensions, which, she argued "are not fit for 21st century lives".

DC schemes are the type people are most likely to be placed into as the reforms roll out. DC schemes have largely replaced "gold-plated" pensions such as final salary schemes where the employee was guaranteed a set income on retirement.

Workers saving into DC schemes take on more of the risk when it comes to the eventual size of their pension income and the outcome will depend on factors such as the performance of investments and annuity rates.

People use their retirement savings to buy an annuity when they retire, which sets the size of their annual income for life. But the rates on offer fluctuate and comparing deals is made more complicated by the fact that there are a variety of different annuities you can buy, depending on factors like the state of your health and whether you want them to provide for just yourself or your partner as well.

The report warned: "The risk of buying at the wrong time, choosing the wrong annuity or failing to find the right rate could increase the number of poorer pensioners by many millions."

Dr Altmann, a former director-general of over-50s group Saga, recently warned that pensioners could be taking on ''the biggest gamble'' of their lives when they buy an annuity and many may never live to see any return on their money.

Her report, titled Pensions - Time for change, was sponsored by retirement products provider MetLife and surveyed more than 3,000 people.

It argued that auto-enrolment will increase " coverage but not adequacy of pensions".

While auto-enrolment will raise the number of people saving into a pension, it will not guarantee these new pension savers a comfortable retirement income, the report warned.

It said: "The typical auto-enrolment pension scheme will place the risks of retirement provision squarely on individual workers.

"They will have to rely on financial markets delivering good returns, reasonable charges and fair value annuities when they need to take income from their investments in later life."

Dr Altmann said the problem with the Government's pension reforms is that they require people "to be able to cope with risks that they do not really understand".

Consumer research carried out for MetLife found that three-fifths (60%) of people do not understand or are unsure if they are fully aware of the risks of investing in a DC scheme. This figure rose to three-quarters (75%) of people aged between 18 and 24 years old.

Nearly three-quarters (72%) of people said they would be more likely to save into a pension if it guaranteed a level of retirement income.

The Office of Fair Trading (OFT) recently advised the Government to look at improving the transparency and comparability of different pension schemes, to make it easier for employers to make the right choice.

The OFT found that up to £40 billion of pension savings could already be in schemes which are delivering poor value or are at risk of doing so.

Most employees do not understand or engage with their pensions, the OFT found, describing them as "complicated products, the benefits of which occur, for many people, a long time in the future".

Dr Altmann also suggested that to shore up more savings, people should think about working for longer and easing into retirement in phases, perhaps by initially going part-time.

She said: " A record one million people are now still working beyond age 65. The old notions of 'early retirement' are being consigned to history but far too few workers are planning ahead for longer working lives.

"This has to be part of the solution to our pensions crisis and, in fact, can be a very positive model for the future....

"T he whole concept of retirement is changing. It will become a 'process' rather than an 'event'."

A Department for Work and Pensions spokeswoman said: " Our reforms to the state pension will introduce a single, simple, decent state pension, which will provide a solid foundation for further saving through automatic enrolment into workplace pensions with employer contributions and tax relief."
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