Pensions: Government consider a money back guarantee


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.