New pension proposals bring higher costs – UK insurers

New pension proposals bring higher costs – UK insurers.

The Association of British Insurers issued a warning against Pensions Minister Steve Webb’s flagship project, dubbed ‘defined ambition’ pension provision, saying that it will be too costly.

In a wide-ranging document, released in full today, the association that considers the role of insurers in Britain said that the new pension system will be too costly to deliver satisfactory outcomes and too difficult to regulate.

The ABI said that whilst defined ambition schemes have the benefit of apparent simplicity to the employee, they also face formidable obstacles. In fact, according to a finding from a recent study by the Institute and Faculty of Actuaries, guarantees on pots that can be moved from one employer to another are likely to cost more than they are worth.

Moreover, it believes that the similarity to with-profits funds is likely to incur the scepticism of regulators.

Meanwhile, a rapidly ageing UK in which the older generation disproportionately holds the majority of financial assets continues to place an unsustainable burden on younger adults, who have neither the house price appreciation or the generous pensions available to those now retired.

In recent weeks, defined ambition schemes have been a particular focus for Webb, who believes that they may offer more retirement security for members than is currently available under defined contribution savings scheme, but lower risks for employers than under the defined benefit schemes offering benefits as a percentage of final salary.

However, these schemes have proved so risky and expensive for employers that roughly 80% of private-sector employers have closed these to new members and a growing number are closing them to future accrual of benefit.

Defined contribution schemes have very uncertain outcomes and retirement incomes depend not only on investment returns, but also on the state of the annuities market and interest rates at the point a worker leaves the labour market.

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