Pension providers have questioned whether the government can deliver on its plans to guarantee retirement income for millions of private sector workers.

Pensions minister Torsten Bell unveiled plans on Tuesday which will require pension providers to offer workers an annual income as standard in retirement.

Dubbed ‘Guided Retirement’, the overhaul is anticipated to bring private sector retirement savings closer to that of public workers, who typically have Defined Benefit schemes.

DB schemes guarantee employees a regular, lifetime income upon retirement calculated by length of employment and salary. 

This differs to private defined contribution (DC) schemes where a worker’s retirement fund is built entirely from money paid by them, their employer and tax relief, which creates the risk of people not having enough money upon entering retirement.

While pension providers have welcomed the possibility of improved retirement savings and the removal of having to deal with difficult financial decisions, some questioned the loss of choice.

Ending flexibility

“Default retirement solutions can help, particularly for those who don’t want to navigate complex decisions themselves. But they should be a safety net rather than a straitjacket,” said Jon Greer, head of retirement policy at Quilter.

“People must retain the flexibility to choose a different approach and access personalised advice where appropriate.”

Emma Furlonger, managing director and retail intermediary at Standard Life, added that a default should provide a “guardrail” rather than being shoehorned in as a “substitute”.

“People should understand the approach being offered, have meaningful opportunities to consider whether it remains right for them and retain the freedom to choose an alternative,” she said.

Income guaranteed?

While the government’s plans lean heavily on “resurrecting proper pensions” for the private sector, providers have pointed out limits to this possibility.

The Retirement Collective pension schemes put forward as an option by Bell to create guaranteed income are hybrid arrangements which combine elements of both DC and DB schemes. 

Instead of individual pots, employers and employees make fixed-percentage contributions into a shared fund managed by trustees.

Laura Mason, chief executive of retail at Legal & General said they can be a “valuable part of the landscape”, but that “higher expected income isn’t free”.

“[The scheme] involves investment risk, and unlike an annuity, income isn’t guaranteed,” she said.

It does not legally guarantee a pension income and the amount received can fluctuate if the pooled fund underperforms or life expectancy rises.

Ken Scott, lead actuary at Royal London, said: “A guaranteed income for life and a guaranteed level of income aren’t necessarily the same thing… the detail of the Government’s proposals will be important.”

Blurred lines and demand

Other providers urged the government to ensure “strong alignment” between the Financial Conduct Authority (FCA), Department for Work and Pensions (DWP) and Pensions Regulator, arguing a fragmented regime will prevent the overhaul being implemented effectively.

The UK DC market is currently split between trust-based schemes overseen by the Pensions Regulator under DWP legislation and contract-based schemes which are regulated directly by the FCA.

“It is important that the new framework aligns with the wider policy landscape,” said James Carter, head of platform policy at Fidelity International.

“This is a pivotal policy and there remain some important principles to be settled to ensure pension members are best supported.”

Despite the overarching positive reaction from the pensions industry, delivering the changes will heavily rely on their systems which could cause heavy operational strain.

Maurice Titley, commercial director of data and dashboard at Lumera, said: “Delivering this will place considerable demands on providers’ data, technology and governance capabilities.

“They will need to understand their membership, identify appropriate cohorts, support transitions between different phases of retirement and demonstrate that the outcomes being delivered match those expected.”