James Moore: Yet another pension idea cannot sweeten the sour taste of retirement poverty

  • @TheIndyBusiness

Outlook To give the impression that they're doing something resembling work, public relations and marketing types like to indulge in something they refer to as "brainstorming".

This involves sitting around a table putting forward progressively sillier ideas until they arrive at the daftest one they can find before unleashing it on an unsuspecting public.

It seems as if staff at the Department for Work & Pensions have had the brainstorming session to end all brainstorming sessions and it's resulted in something called the "Defined Ambition" pension.

Today's workplace pensions are split between defined benefit (final salary) and defined contribution (money purchase). The former guarantees you a percentage of final salary when you sail off into the sunset. What you get with the latter depends on investment returns. Most of the public sector are on the first type, although ministers would like to change that for everyone other than MPs and top civil servants. Most of the private sector are on the second, or they soon will be. If they've even signed up.

A signature won't be necessary for long under Government plans to automatically enrol people in workplace schemes. But even then the DWP realises that the amount it's telling employees to stash away might be insufficient if it wants to get the state off the hook for retirement provision.

So it would like people to save more, and after a really intense brainstorming session the DWP has decided that it could do this by persuading employers to risk signing up to a sort of "halfway house" pension that offers employees guarantees. Just guarantees that aren't as onerous as traditional final salary schemes, which can break companies that offer them.

A number of options are explored for its inadequately Defined Ambition, but the DWP doesn't address the nub of the problem: Offering guaranteed returns is ruinously expensive.

It is because of this that the DWP's defined ambitions are going to be thwarted. Some employers might have made encouraging noises but they'll run a mile after their finance directors work out the price.

What could make workplace pensions better is to cut down on costs, perhaps by pooling lots of employers' defined contribution schemes. But the DWP is rather light on ways of achieving this.

And anyway, there are strong arguments to suggest that saving through a pension is exactly what a lot of people shouldn't be doing at the moment.

With interest rates low, it makes sense for those who have mortgages to use their spare cash to pay down the capital and to attack their other debts. If they do they'll have ample funds free to save when interest rates and investment returns may both have risen.

As for the DA pension? It sounds very much like a way of trying to sugar coat (or avoid) an unpalatable fact. Sort of like calling radiation "magic moonbeams".

The best way, the only way, of ensuring people have better pensions and are thus less reliant on the state is to tell them the truth: They can chose to work for longer or they can save more. It really is that simple. Trying to sweeten the pill with silliness like a new sort of pension added to an already horribly complicated mix won't change that.