Private sector final salary pension schemes have been “destroyed” and the less generous workplace pensions that have replaced them are “failing” savers with high fees and low returns, former City Minister Lord Myners has warned.
The peer has written to the Chancellor proposing a radical overhaul of the pensions market to prevent private sector savers being hit by hidden fees and low retirement incomes.
Under Lord Myners’ proposals, who is a former chief executive and chairman of pension fund manager Gartmore Group (Frankfurt: A0YGLU - news) , the Government would enter the annuities market to provide low-cost competition to the insurance companies who currently dominate the industry.
Lord Myners said that the arrival of the Government as a “new operator” in the annuities industry would address the “market failure” of the current system, where management costs are “too high” and fees can “take a big slice” of people’s pensions.
Treasury-backed annuities would be particularly helpful to the 150,000 private sector workers who retire each year with a pension pot worth £10,000 or less, Lord Myners said.
“Fees are too high and there is little competition in the annuities market, particularly for people with small pots,” he said.
His plan relates to so-called defined contribution workplace pensions. Under such schemes, workers use the pension pot they have built up through contributions to buy an annuity from an insurance company, which guarantees them an income for life.
However the market has been deemed deeply uncompetitive. A report last week which found that “sharp” practices and “murky pricing” mean that the 500,000 private sector workers who retire every year are being short-changed by an average of £2,000 each when they buy an annuity from an insurance company.
“This is an uncompetitive market,” Lord Myners said.
Defined contribution schemes have largely replaced more generous final salary or defined benefit - schemes, which companies are closing down because they are too expensive to run and are burdened with red tape.
Lord Myners said that final salary schemes were a “single generation phenomenon” and lamented their decline.
“We have destroyed something which I think we all know was a rather good development. I fear that it is an irreversible decision,” he said.
He said that defined benefit schemes failed in part because Parliament “put too much pressure on this beast and burdened it with all manner of additional requirements”.
Under Lord Myners’ plan for the Government to get involved in defined contribution schemes, people would buy their annuity from the Treasury’s Debt Management Office (DMO), which runs the debt and the cash management for the Government.
The DMO would insure the risk and provide an annuity through National Savings & Investments, the Government agency. The pension payments would be made through the Post Office.
He said that the move would give the Government cash flow and it would give savers security.
Lord Myners said: “Here is a novel way of funding the government’s debt in a new way that also addresses the social need of addressing the uncompetitive pensions industry.”
“I am sure that many people would rather have an annuity from HM Treasury than XYZ insurance company. For a start, who knows where insurance companies will be in 30 years’ time. The Government is quite an attractive option,” he said.
“I have written to the Chancellor to encourage him to explore it with DMO and NS&I.
A Treasury spokesman said: “The Government wants to help consumers get the best from the annuity market, and recognises that there can be particular issues about individuals accessing small pension pots.
“This is why the Government announced in December measures to allow holders of small personal pension pots to take up to two small pots as a lump sum, and why DWP are consulting on options for dealing with future small pension pots.”
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