At last: a fair trade in pensions

Cheap and cheerful new private pension plans could soon come on to the market, if the Government decides that the Office of Fair Trading has come up with the answer to a problem which pension funds, insurance companies and successive governments have failed to solve in the past.

The OFT's report yesterday damned many existing personal pension plans as poor value for money because of the high cost of paying commission to salesmen, the heavy charges loaded on to schemes in the early years, and the additional charges levied by pension managers to pay for investment skills which, in the event, often fail to deliver.

At the same time it tells us what we already know: that company schemes that pay pensions based on length of service and final salaries penalise anyone who changes jobs - and that includes 95 per cent of all current employees - because the pensions they leave behind cease to grow in value.

After 10 years of inflation at 5 per cent a year, a pension would be worth only half what it would have been if the employee had stayed with it. It is possible to take a cash sum when you leave an employer, and invest it in your new employer's scheme, but fund managers levy arbitrary charges on anyone who wants to take their contributions with them.

So the OFT wants the Government to support a plan for a Designated Pension Plan, or DPP, which would be invested in tracker funds, ie shares chosen to move in line with the stock market average. That would do away with the expensive investment managers who claim to outperform the market average, but more often than not fail to do so.

Although the contributions would be invested in shares in the early years, to get the benefit of their superior long-term performance, the money would be switched over the years to less volatile investments such as index-linked government stocks, which protect both the capital and the income against inflation. That way, individuals who are coming up to retirement age would not run the risk of cashing in their fund to buy a pension annuity at a time when share prices were depressed.

Under the OFT plan, when the time comes to retire individuals would be able to take their accumulated fund and buy the pension itself from any provider. That would eliminate another of the injustices in the present system, which allows fund managers to levy extra charges on anyone who wants to buy their a pension from another provider who may offer a better rate.

The OFT pension plan would also insist that the eventual pensions were index-linked, to protect them from inflation. The present system offers a choice of fixed pensions, or index-linked ones which for the first 10 years or so will be smaller than a fixed-rate pension. More controversially, the OFT also wants men and women to get the same amount of pension in return for the same size of pension fund when they retire. Under existing rules, men get a bigger pension for the same money, because on average they do not live as long to enjoy it as women of the same age.

Existing pension fund providers could offer DPPs, but building societies, friendly societies and trade unions would also be allowed to offer them, increasing the competition and helping to cut the charges. All providers of DPPs would have to publish, and charge, a flat percentage rate on the value of the funds invested, with none of the hidden extras that plague existing pension plans; and they would not be allowed to penalise people who failed to keep up their plans, by loading charges on to the early years of contributions.

Employers who currently have a company pension plan would be required to contribute to a DPP plan if an employee chose not to join the company scheme. This is another change from the existing system, which allows employers not to contribute if employees join a personal pension plan instead of the company scheme.

The new pension plan does not get to grips with the problem of those employers who still do not have a company pension scheme, or the 25 per cent of employees who will rely entirely on the state pension, or the prospect of people paying for their own pension schemes and then paying again, through taxation, to provide for people who were unable or unwilling to join a pension plan of their own. The only way to solve that problem would be to make pension plans compulsory for all workers, and that is something the OFT would rather leave the Government to decide.

The OFT wants the Government to maintain tax concessions on pension contributions. It also wants employees to be given unbiased advice on how much they ought to be putting into a pension scheme at various stages of their working lives. There is, of course, no exact figure, but many pension experts say it ought to start at 5 per cent of income early on and rise to 15 per cent when employees are older, and can afford it.

There will still be no guarantees, when the time comes to retire, that the pension will provide an adequate standard of living. The new DPP is intended to run parallel with existing schemes, rather than replace them. But after all the false starts in trying to get a proper private pension system that employees will trust, and to which they will contribute freely, this is a positive plan - and it could be up and running within a yearn