Institute for Policy Research

Will money-back guarantees reduce the risks people face in defined contribution pension schemes?

Mon Feb 03 14:15:00 GMT 2014

Latest research questions the cost and effectiveness of new UK Government proposals to minimise the risks of defined contribution pension schemes by introducing ‘money-back guarantees’.

In April 2013, the Institute for Policy Research at the University of Bath released a Policy Brief that exposed the likely risks that individuals face in defined contribution pension schemes, such as the quasi-compulsory National Employment Savings Trust (NEST).

The UK government has recognised that these schemes do shift investment risks onto the individual, and the latest policy announcements have suggested a need for a new type of “defined ambition” pension scheme incorporating some degree of risk sharing. One proposal for this risk sharing is a money-back guarantee under which individuals are promised that the value of their pension pot at retirement will be at least equal to the amount of savings that they have made into the pension scheme. However, the latest research by Professor Ian Tonks (University of Bath, School of Management) and Dr Edmund Cannon (University of Bristol, Department of Economics) show that not only are such guarantees expensive (and hence will reduce the value of the pension pot), but also that the likely pension income from a money-back guarantee is very small, and will not provide a satisfactory income in retirement.

Read their latest report on - Pension Guarantees: are they worth the paper on which they are written?