Pension reforms ‘risky for millions’

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Millions of workers will be exposed to ‘risky’, hard to understand and outdated retirement saving schemes under the Government’s landmark reforms, former Downing Street pensions adviser Ros Altmann has warned.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. They 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.

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 them 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 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 of people aged 18 to 24.

The Office of Fair Trading 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.

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.

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.”