Pensions - Articles - Income is key to success of Defined Ambition Schemes

 Paul Sweeting, European Head of Strategy at J.P. Morgan Asset Management welcomed remarks made by the Pensions Minister Steve Webb at the weekend on a potential new type of "defined ambition" pension arrangement.

 But cautions that the nature of the arrangement would be key to its success, and in particular how the value of an arrangement is communicated to members.

 "The cost of defined benefit provision has increased significantly over the last few decades," commented Sweeting. "Falling interest rates and rising longevity have played their part, but the increasing level of guarantees should not be underestimated. It is these guarantees that cause many of the problems under the planned revision to the IORP Directive, or ‘Solvency II for Pensions'," he continued. "As such, any arrangement which increases flexibility should give the scope for defined benefit-style provision at a lower cost, and this has to be a good thing".

 However, Sweeting was keen to stress that talking in terms of income was key to the success of the strategy. "It is crucial that any defined ambition is given in terms of a pension at retirement, even if the date of retirement is flexible. One of the greatest challenges with defined contribution schemes is communicating the value of a defined contribution arrangement to a member. It is very difficult to come up with a rule of thumb to convert accumulated assets plus future contributions into an expected level of income at retirement, let alone to get a feel for the range of reasonable outcomes. This means that there is a significant risk that by the time people realise that they have insufficient assets to fund a comfortable retirement, it's too late to do anything about it. If, instead, people build up rights to even an approximate level of pension, their retirement planning starts with a stream of income rather than a level of assets. As the Pensions Minister noted, it is better to know roughly what you are getting, even if it is within a framework that feels less generous than that available to previous generations."