Collective Pensions - Are they the answer?06 Nov 2014
Laura Milne - Founder and Managing Director Lime HR
With over 15 years experience working for some of the UK’s top employment law firms, Laura Milne is at the forefront of HR and employment law in the UK and she specialises in every aspect of it. This includes business transfers, restructures, redundancies, performance absence, discipline, grievances, discrimination, settlement agreements, and employment tribunals - to name just a few.
Laura tells us about the upcoming recommendation for the new collective pension scheme as hinted at within the Queen’s Speech yesterday. In particular, we were told that pension reforms are a “key priority” for our Government and that legislation would be brought forward to give savers further discretion on the use of their retirement funds.
In this article Laura now explains what this might mean in practice.
“As confirmed by yesterday’s Queens Speech plans are afoot to allow workers to contribute to something called a ‘collective pension’.
What is it?
This comes from a Dutch and Canadian initiative and will allow funds to be run collectively as opposed to individually. It is hoped that this will help keep costs down and ergo profits (and pensioners’ incomes) up. The pension changes are not expected to become law until 2016 and is one of many changes to pensions the Government have been looking at in recent years.
How will this work?
Workers and employers will pay their contributions into one pot, rather than an individual one, this will contain contributions from tens of thousands of others and it shall then be invested in stocks and shares.
When someone reaches retirement, the insurance company running the scheme will work out how much income they have every month, based on factors such as;
b. how much they've contributed over their career and
c. how well the invested pots have performed.
Therefore, rather than the success of an individual pension pot being dependant only a handful of investments they are in, the collective pot is designed to ‘spread the risk’ across a wider range of investments, hopefully giving the opportunity for larger growth yet mitigating losses during tricky times.
How does this compare with current schemes?
Currently many employees are on what is called a ‘defined contribution scheme’. This type of scheme will have a degree of uncertainty on what savers will receive on retirement. Most then need to buy an annuity on retirement to give them a certain income.
Other, more lucky employees, are on schemes called ‘defined benefits’ which include final salary schemes, these give workers a guaranteed income in retirement based on their working record, but can be expensive for employers who have to meet the promises they make.
It is hoped that the new collective scheme shall fall somewhere between the two. The new collective scheme will pay out an income on retirement so no annuity is needed and the level of income each year shall be decided by Actuaries who shall aim to achieve a particular level.
It is hoped that the new collective scheme will be better than the current defined contribution one but, of course, this cannot be guaranteed and possibly more research is needed.
Some critics point out that an annuity will provide for a guaranteed income whilst the collective scheme will provide only a ‘target’. The same age old issue still remains where investments might fail and pensioners see a drop in their income as a result.
It’s important also to remember that because funds are shared by people of all ages, there is the possibility of ‘inter-generational’ conflict. There have been recent complaints in Holland that savings from younger workers are being used to subsidise the retirement incomes of the elders. In fact, people in the Netherlands have been calling for a move to a similar system to the UK, following a period of poor performance by collective schemes.
In summary, what is clear is savers of differing ages, income levels and financial commitments will have different priorities so while one person may feel they will benefit from having their retirement pot collected in a group, another might not.
With so much debate and uncertainty surrounding pensions in recent months what must be certain is there is no ‘one size fits all’. Workers undertake their own research, determine what best fits with their own personal circumstances and perhaps try not to put all your financial eggs in one pensionable basket if at all possible”.
Disclaimer; The information in this website is for general guidance on your rights and responsibilities and is not legal or financial advice. If you need more details on your rights or legal advice about what action to take, please contact an adviser or solicitor.
Laura J. Milne
5th June 2014
T: 0208 906 6878
Follow Laura on twitter @UKLaw4Employers for further advice and guidance on this and other HR issues.