The government are currently drawing up plans to create a new type of pension which will fill the void that has been by the demise witnessed to Defined Benefit Schemes. Pensions minister Steve Webb has been negotiating with major companies regarding the proposals to design the ‘defined ambition’ pension scheme.

Guaranteed pension pot

Under this new pension, private sector employees could be receiving a fixed income or guaranteed pension pots during their retirement if they choose to work longer. Webb stated that introducing a measure of certainty to the pension will be welcomed by those looking to save for the old age.

This has motivated the government who are now looking into other possible options that could replace the old model, with the one backed by Steve Webb being called the defined ambition pension. Under this pension scheme any risk and uncertainties that the investor could experience, will be shared with the employer.

One example of such a scheme is the ‘cash balance’ pension scheme, under which the company will make a guarantee to its employee to provide a fixed pension once they retire. By design the employer will take on the uncertainty of how much pension the savings will be able to purchase.

One other model being considered will see any randomness associated with life expectancy being shared between employee and employer. Here the company will pay a guaranteed pension but the date at which the pension is paid will change depending on whether life expectancy has risen.

Webb also said that another Defined Benefit Schemes could give younger employees an idea of how much their pension will be worth, and as they get closer to retirement age they will be provided with more certainty over its value. Using our pension calculator any person saving into a pension can get an idea of what it will be worth when they retire.

More flexibility

The idea of the new Defined Benefit Schemes being created is to provide savers with more flexibility to employers, but doing this without pushing all the uncertainty on to workers. At the moment the workers who have been signed up to their companies pension scheme will find that the value of their pot is reliant on the stock market and interest rates.

The new scheme will ultimately replace the final salary pension scheme which has grown increasingly out of favour with companies in the private sector, but are more prolific in the public sector. Final salary pension schemes would allow the employer to receive an income of almost two thirds of their income they would receive each for every year they have been in retirement.

Source: Pension Calculator