'Collective pensions' set to be unveiled in Queen's Speech

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Plans to allow workers to contribute to Dutch-style collective pensions are to be unveiled by the government.

The move is expected to feature in a Pensions Bill to be announced in the Queen's Speech on Wednesday.

By running funds collectively rather than individually, supporters argue costs will be lower and therefore pension incomes will be higher.

Ministers say the move will give people "better value", but critics argue the returns are not certain.

Under the changes, which could be introduced by 2016, workers would be able to pay into funds shared with potentially thousands of other members.

BBC political correspondent Ross Hawkins said there was "a growing political consensus behind the idea".

Profit margins

The government has been looking at alternative pension arrangements for the past couple of years, because the move from defined benefit to defined contribution schemes has seen the balance of risk move from the employer to the employee.

Pension schemes explained

  • Final-salary scheme: Guaranteed pension based on earnings at end of your career and length of service. Also known as defined benefit schemes
  • Career average scheme: Guaranteed pension based on your average pay over your career
  • Defined contribution scheme: Determined by contributions and investment returns. Usually worth less than final-salary pensions. Savings used to buy an annuity, or retirement income - until now

Currently, defined contribution schemes, where the value of the pension is determined by the level of the contributions and subsequent investment returns, are run on an individual basis.

Collective funds pool all contributions into one big fund, so the administration costs are lower.

The second difference is that the pension scheme itself pays out an income in retirement, so there is no need to buy an annuity. The level of income is determined each year by actuaries, who try to maintain a particular level, or increase it a bit.

This model "should deliver better pensions than pure defined contribution, because the costs of managing them are lower due to economies of scale, and you are not giving big profit margins to annuity companies, so there is more money to pay out directly," Ross Altmann, an independent pensions expert, told the BBC.

Pensions minister Steve Webb told the Sunday Telegraph that collective pensions give "people greater certainty and probably better value."

"There are some quite strong claims made for how much better it is. People say you will get a 30% bigger pension.

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Not everyone needs to buy an annuity, but those who do so only have one shot”

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"You might, you might not, but clearly it is pretty unambiguous that you will get a more certain outcome and potentially a better one."

Labour's shadow work and pensions secretary, Rachel Reeves, said: "We need to do much more to boost the value of people's savings.

"Labour said last week we would legislate to make collective pensions schemes possible - now, just days later, ministers are following suit. We will, of course, support any move to go down this route."

But critics of the model have warned that, unlike a fixed annuity, pensioners only have a target for what they will receive in retirement - rather than a guarantee.

If the collective fund's investments fail to generate the predicted profits, pensioners could see their incomes fall in some cases.

"If markets don't perform or life expectancy rises by more than expected, then it might be necessary to cut pension incomes," Ms Altmann said.

Greater freedom

The plan is based on schemes that are already operating in the Netherlands and Scandinavia.

However, following the disappointing performance of some schemes, there have been discussions in the Netherlands about abandoning collective pensions in favour of British-style individual pensions.

The Queen's Speech will set out the government's final legislative programme before the 2015 general election.

The government has already revealed plans to overhaul the pensions system, with Chancellor George Osborne pledging in his March Budget to give people more control over the way they use their pensions.

One way in which he has done this is to end the requirement to buy an annuity.

Previously, most retirees - particularly those in a defined contribution scheme - were forced to buy an annuity, which gave them a fixed annual income for life. The bigger the pension pot, the bigger the annual income.

Under the new rules, retirees have far greater freedom to do what they want with their pension savings, including taking a large chunk out immediately to spend as they wish.

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