Webb offers alternative to final salary pension

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Plans for private sector workers to have guaranteed pension pots have been proposed by Steve Webb.

The Pensions Minister wants employers to offer an alternative to the final salary arrangement, which has now largely been discarded in favour of defined contribution schemes.

Webb has reportedly begun discussions with large companies to introduce “defined ambition” pensions. These would offer more certainty over the fund amount at the point of retirement.

The cost of providing this guarantee would be shared between organisations and their workers. The minister argues that firms are prepared to pay the higher price as they can encourage loyalty among employees.

A number of methods of operating the scheme have been put forward. Potentially employers could promise the value of pension fund upon retirement, but it would be up to the worker to buy the annuity paying an annual income.

A further proposal is to offer a worker a minimum annual income, which could then increase in value if investments perform well. Finally, a defined annual income could be arranged but only if the worker agrees to delay their retirement until a set time, such as 20 years below the average life expectancy.

These latest plans are in addition to auto-enrolment which is due to come into force from October, starting with the largest companies first. This will ensure that every employee is automatically entered into an occupational pension scheme.

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