Speaking at a European pensions conference on Tuesday, Mr Webb said pensions providers should seize on the ‘gap in the market’ for innovative pension products that might include some form of cost-efficient guarantee.

‘I am convinced people have a huge appetite for certainty about their pension savings, and this demand will drive the shape of pension provision in the future. I want industry to innovate and think hard about this,’ he said.

‘With the dawn of automatic enrolment the market is growing – so now is the time for pensions industry to look at the market gap in relation to affordable guarantees and provide the products consumers are seeking.’

Among the examples given by Mr Webb were providing an affordable ‘Money Safe’ guarantee where scheme members receive at least the nominal value of the contributions made by them and their employer, as well as tax relief.

Alternatively, providers could offer an investment strategy that reduces the probability of capital loss, such as the National Employment Savings Trust being launched as part of auto-enrolment.

Formal government plans for ‘defined ambition’ pensions will be set out later this year, the Department for Work and Pensions said.

These will include exploring whether creating larger pension schemes might be more efficient and enable different forms of risk sharing, investment strategies and guarantees.

At the ‘lower end of the scale’, they might involve using nominal guarantees to provide more certainty in outcomes.

Andrew Vaughan, chair of the Association of Consulting Actuaries, said that offering underlying guarantees was generally a good idea if they could be provided at a reasonable cost and be sustainable in the long term.

‘A recent Organisation for Economic Co-operation and Development report costs the guarantee of a return of contributions at retirement age at 0.06% per annum (assuming a 40-year savings period), but the model this is based upon is optimistic compared to current market conditions and, almost certainly, such a guarantee would cost more to deliver,’ he said.  ‘However, even double or treble the cost may be reasonable if it encourages DC members to save.

‘DC investors might aspire to higher guarantees, such as “no decline in the pot as against last year”.  Unfortunately, the greater the guarantee, the more likely it is that the eventual outcome will trend towards bond/cash returns (less expenses).’ 

He added: ‘DC members generally need significant real returns, given the average contribution rates being paid, so any DC guarantees need to be relatively modest and fully explained to savers as to their impact on returns. Equally, guarantees need to be very carefully thought through by providers.’

Comment: The pension minister’s dream product will probably be a big hit in Garrison Keillor’s Lake Wobegon where all the women are strong, all the men are good looking, and all the children are above average.

Back here on earth guarantees have a heavy cost, and that cost tends to arise at just the wrong time, I suggest that we should be looking for arrangements which offer reasonable and sustainable defined benefits. I recently outlined such an arrangement, but as far as I know there are no takers.

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05/07/2012
Submitted by: Brian Jones, Retired