A RADICAL shake-up of the pension system is set to be unveiled in the Queen’s Speech on Wednesday.
The proposal will mean that for the first time employees will be given the power to pool their money in “pension collectives”, a system pioneered in the Netherlands.
The so-called “mega funds” are regarded by many as a better investment because they are less vulnerable to variations in the stock market.
The changes, which could be introduced as early as 2016, are intended to deliver better value for pensioners.
The new proposals will apply in Scotland if voters reject independence in this September’s referendum.
Liberal Democrat pensions minister Steve Webb described the collective schemes as “some of the best in the world”.
Mr Webb said the key advantage was “pooling risk” of investments performing less well than expected across large numbers of people of different ages, “just like car insurance or the NHS”.
He said: “It gives people greater certainty and probably better value. There are quite strong claims made for how much better it is. People say, you will get a 30 per cent bigger pension. You might, you might not, but it is pretty unambiguous that you will get a more certain outcome and potentially a better one.”
However, critics of the collective pension model have warned that, unlike with a fixed annuity, pensioners only have a “target” for what they will receive in retirement instead of a guarantee.
If the collective fund’s investments fail to generate the expected profits, pensioners could see their incomes fall.
And Dutch politician parties have recently called for collective pensions to be scrapped in favour of individual pensions.
The workplace pension shake-up is set to be steered through by the Department for Work and Pensions.
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.”
Meanwhile, the Treasury will take responsibility for a new Bill sweeping away tax rules that have prevented pensioners taking more than a quarter of their savings in a cash lump sum.
Mr Webb has spoken out against tax breaks in the pension system and hinted that measures to reduce them could also be on the cards. “We know the cost of pensions tax relief is a very large number and the benefits are heavily skewed towards high earners,” he said. “In the real world a government will want to spend less rather than more on pensions tax relief.”
The Queen’s Speech comes amid criticism of the UK government over the number of unfinished bills it is bringing forward into the last ten-month session of parliament. Last week Labour released figures claiming the Coalition had become a “zombie government” with MPs debating fewer government bills last year than at any time since 1950.
Labour leader Ed Miliband said a record number of unfinished bills, carried over from the previous parliamentary session, demonstrated that “ministers have run out of ideas”.