Research from the Institute and Faculty of Actuaries could pave the way for guaranteed pensions

In April of this year Pensions Minister Steve Webb announced that he wanted pension providers to come up with schemes that offer a “Money-back” guarantee to return the nominal value of a worker's contributions – in other words, workers getting back at least what they put in. Suggested as one of the ideas collectively coined “Defined Ambition Pensions”, the initial response from many commentators was that the provision of a guarantee would be prohibitive, either as an initial cost or in dampening returns. 

However, research by members of the Institute and Faculty of Actuaries begun in 2010, examining whether or not there was an appetite for a guaranteed pension in the UK market, what it could look like and if it could be provided at a reasonable cost, suggests that a well-designed guarantee need not be cost prohibitive nor unduly dampen investment returns.

The Institute and Faculty of Actuaries paper “Is there a place in the UK Defined Contribution pensions market for a guaranteed savings product?”, was discussed with Steve Webb and an audience of members of the Institute and Faculty of Actuaries today.

Steve Webb, the Pensions Minister said that;

“Developing products like a “money-back guarantee”, where at the very least a pension fund returns the value of contributions, is one way of ensuring risk does not lie solely with the individual. I have challenged the pensions industry to create new models of defined ambition pensions and this work is very encouraging. We will be publishing more ideas on reinvigorating workplace pensions later this autumn.”

Scott Eason, spokesman for the Institute and Faculty of Actuaries and one of the authors of the paper, commented that;

“When we looked at whether or not there was a demand in the UK market for a guaranteed pension the answer was clearly yes. The key questions were; how could this be provided? And could it be provided at the right cost?

“A number of investment techniques already exist in the UK pensions market that with the right engineering would be suitable for this purpose, including life-styling and volatility targeting. However there are also a number of challenges to using techniques like these, not least the effective and clear communication of a complex product that delivers to a simple ambition, namely to save for retirement whilst guaranteeing not to lose capital and without sacrificing potential for capital growth.

“Value will depend on the impact of charges on expected returns and the amount of risk being removed.  We conclude that a full “Money-back” guarantee may not be practical but that a guaranteed product to protect a built-up pension pot as individuals near retirement could be an attractive and affordable option.

“The next challenge is to create a model for this product and look at the education and communication that would be needed to support it.”

~Ends~

Editors notes:

More about the Institute and Faculty of Actuaries

1. Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
2. Members of the Profession have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
3. The Profession is governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.
4. The Institute and Faculty of Actuaries is available to provide expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions