Editorial: Floating a balloon

This week we take a look at the government's pension income builder, the option preferred by pensions minister Steve Webb and the Pension Protection Fund's Alan Rubenstein, revealed in a special column for us last year.

It is clear the value of any such system for the member, and by implication whether it is better than a standard defined contribution scheme, rest on how the new schemes are implemented.

Illustration by Ben Jennings

That sounds pathetically obvious, but the success of the system does rely on the vehicle's ability to get over the traditional problems with deferred annuities. 

And even then it is not a philosopher's stone. The calculations carried out for the Department for Work and Pensions by fiduciary manager Cardano assume 20 per cent contributions paid from the age of 25. How many 25-year-olds do you know on that kind of rate?

Now the comparison made with a defined contribution scheme – showing a little less possibility upside, but greater certainty against market falls – work at lower contribution levels.

But to again state the obvious, these scheme structures work not just where the regulatory environment is set up, but where the money going in is high enough. "If you want a good pension, you need to pay good contributions," as the manager's Stefan Lundberg told me.

At a parliamentary reception for the European fund management industry last week, a central challenge noted by the asset managers on display was getting good retirement outcomes for the next generation of savers.

If DC is not going to be substantially improved whether through consumer protection on charges or higher minimum contributions, those employers wanting to offer more than the bog standard are going to need more than theory from the government.

But they are going to have to pay for it.

Ian Smith is editor of Pensions Expert. You can follow him on Twitter @iankmsmith and the team @pensions_expert.