Pensions: Government consider a money back guarantee

Posted on July 9th, 2012 | Categories - News

Today’s Daily Telegraph lead with a story that the government are to consult on plans to give pension savers certainty that their pensions will not be worth less than they have paid in when the time comes to retire.

One third of people over the age of 50 have no private pension provision and the government are concerned that fluctuations in the stock market are putting people off saving for their retirement, because they are worried that they will get less back than they have put in.

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The Pensions Minister, Steve Webb (pictured above), is keen to give savers “certainty” over their pension fund and is proposing that pension savers take out an insurance policy, possibly offered by pension providers or an insurance company, which would guarantee that the final pension fund would not be worth less than the total contributions made in.

Reports today signal that the insurance would cost 0.75%, although it is unclear whether this is a percentage of the annual contribution or the fund value.


A consultation paper will be introduced this year with Mr Webb quoted by the Telegraph as saying: “People really don’t want to work for a year and get a pension statement showing their savings have gone down not up.”

He continued: “As part of the options we offer people, we want greater certainty and guarantees or insurance to be on that list. Auto-enrolment is our best chance of getting people into saving and if they are put off by fear of risk, volatility and uncertainty, it is very hard to get them back again.”

“Some form of guarantee has an important part to play in the success of auto-enrolment.”

Auto enrolment is the government program, starting later this year for larger firms, which will see every worker in the UK earning above £8,105 per year automatically enrolled into a work place pension, into which they and their employer will have to make contributions.

Whilst workers will be automatically enrolled they will have the option to opt out and the government is clearly nervous that many people will simply leave the scheme, concerned that the money they invest will fall in value.

Expensive insurance?

With so many people not saving for retirement any incentive to save has to be examined carefully.

Whilst is true to say that many people are put off saving for their retirement due to horror stories about pensions, some experts will argue that paying a relatively expensive insurance policy just to guarantee no monetary loss in value is not the ideal solution.

Firstly guaranteeing the monetary value will do nothing to offset the effects of inflation, which can be just as damaging as falls in the stock market.

Secondly, one of the major issues facing would-be retirees at present is the huge falls in Annuity rates we have seen over the past few years, meaning lower incomes in retirement for many. The Bank of England’s policy of Quantitative Easing (QE), in conjunction with other factors, has pushed down gilt yields, which in turn is reducing Annuity rates significantly. An insurance policy, as touted by Mr Webb, will not help address this issue.

Finally, financial experts will point out that over the longer term, it is unlikely a pension fund would be worth less than the sum of all contributions, including tax relief. A relatively expensive insurance policy could therefore be of little value, offering protection against an unlikely outcome.

The government clearly want to make pensions more attractive and no one could accuse Mr Webb of unimaginative thinking, however it remains to be seen whether this proposal will see the light of day after what will undoubtedly be a lengthy period of consultation.

4 Responses to “Pensions: Government consider a money back guarantee”

  1. Andy Robertson-Fox says:

    I have no confidence whatsoever in this man Steve Webb. There is an iniquitous policy that has been perpetrated on 4% of the total UK State Retired Pensioner – the frozen pensioner.
    By this policy those living in the UK, EU or certain select countries like, for example, USA, Phillipines and Israel get the annual index linking uprate each April. Those that have retired to Australia, Canada Thailand and even the Falkland Islands do not; their pension is frozen at the rate first payable in the host country. Thus a centenarian living in Australia is told she can live “in retirement with dignity” on £6.12 per week (the full rate when she retired in 1970). There is no legal justification for this – the ECHR did not, in a court case two years ago, make such payments illegal. There is no moral justification either – when working contributions to the NI Scheme weremade under the same terms and conditions as everyone else; withdrawal from the NI Fund should also be on the same term and conditions now in retirement. There is also no finacial justification – the ring fenced NI Fund is curently in surplus of £38 BILLION and there is no administrative justification as pensions are already paid world wide.
    This is the siuation inherited by the man who tabled an Early Day Motion calling for the abolition of the frozen pension ruling and, prior to the last election, vowed to do so. He is now the Minister for Pensions, Steve Webb; he has proved to be nothing more than a hypocrite.

  2. George Morley says:

    Mr Webb quoted by the Telegraph as saying: “People really don’t want to work for a year and get a pension statement showing their savings have gone down not up.”
    I really cannot believe that a person in the position of Pensions Minister can say such things when he blatantly freezes just a minority of British pensioners who have all paid the same N.I. payments along with their employers contribution for a full pension in retirement and their pension certainly goes down with inflation taking effect and no increases ever. The Prime Minister is no better when he constantly talks about fairness for pensioners and conveniently forgets those he willingly deprives of their pension. The previous comment talks about the surplus in the NI fund and the government borrow from it through the Debt Management Office and pay back the interest for the loan which last year was 1.3 billion GBP and Steve Wbb says that they cannot afford the 6.5 million GBP that it would cost to pay All pensioners wherever they choose to live which should have been the case all along.
    Maybe you should advise Steve Webb about fairness and morals when dealing with finance.

  3. Jane Davies says:

    Perhaps I will ask for my money back. All the money paid into the NI fund for 40 odd years for my guaranteed index linked state pension that is frozen at the first payment I had four years ago. Why? Because I retired to join family in Canada, if I lived a couple of miles away across the border I would be enjoying my rightful annual increases like the British expats in the USA. This is theft and discrimination, a disgraceful way to treat seniors, but then of course the millionairs running the country couldn’t care less. Shame on the lot of them.

  4. Jeff Chipps says:

    From the above article Steve Webb said….
    “People really don’t want to work for a year and get a pension statement showing their savings have gone down not up.”
    Well Mr Webb – my wife and I worked for forty years and my UK state pension is guaranteed under current UK legislation to go only in one direction – and that’s down!!!

    I’m afraid that when you say……
    “As part of the options we offer people, we want greater certainty and guarantees or insurance to be on that list”
    Your words are hollow, without conviction and reeks of dishonesty!!

    I say this because I am a “frozen” UK pensioner – and if anyone doesn’t know what that is – well just read the previous comments!!!

    Why would anyone believe you when in 2004 you said…..
    “All state retirement pensions in payment to pensioners living outside the United Kingdom shall be subject to annual uprating by the same percentage rate as is applied to such pensions payable to pensioners living in the United Kingdom.”

    And then in a response to a question in an interview with The Guardian in March 2012 you said….
    “We want all pensioners to have a decent and secure income in their retirement”

    Also in The Guardian’s interview you came out with …..
    “When people have saved for a pension, it is vital that they get the best possible pension out of it”

    This one’s quite good too when you stated to The Guardian again……
    “I’m absolutely committed to making sure that generations yet to retire have a decent state pension as a foundation and a pension of their own.”

    But this one takes the biscuit. It’s again from The Guardian in March 2012…..
    “The sooner you start, the sooner you will build up a ‘big fat pension pot’!”

    How can you spout so much rubbish when there are over half a million UK State Pensioners who have a pension that DECLINES every year – due to inflation – and due to your legislation??

    Why should ANYONE believe you – because I for one don’t!!!

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