One way of explaining how expensive pensions are is through the concept of a pension pound, effectively the cost of providing a poviding a pound sterling from each year from 65 to someone’s death.
If a pension pound costs £20 then the cost of 10,000 pension pounds is £200,000-a threshold amount for most people trying to supplement state benefits.
The majority of people in Britain would regard £200,000 as a a pretty good pension pot but when you think this only provides a level pension of £10 k pa then you realise it doesn’t go very far at all. Think £300,000 to get some proper indexation and a little more for a spouses pension. Makes you realise the value of state pensions doesn’t it?
Now why doesn’t the Treasury start thinking in terms of issuing these pension pounds? I know we would need to have a number of issues with varying coupons for males and females and different issues for different ages but it’s not that hard.
Imagine going into the post office and swapping your £20,000 of premium bonds for a promise of a cheque for £85 per month for the rest of your life.
Or more pertinently, imagine personal accounts which had a default exit route into pension pounds where the Treasury (with GAD’s help) determined the longevity premium and effectively underwrote the risk.
The idea could be developed to ensure the pre-purchase of these pounds where the coupon could be rolled up till a retirement income needed to be drawn- a simple and convenient means to lifestyle which would provide certainty without the complications involved with the current system of annuity purchase.
Flexible, predictable and effecient, pension pounds could be paid with your old age pension and S2P with a minimum of fuss. Pension Pounds could be used to mop up de-minimus money purchase pots and could be made available as the default annuity option for all money purchase pensions establishing the bar for commercial annuity providers to aim for.
Maybe one day we could simplify the whole DC system and companies could choose to pay a proportion of earnings in today’s pounds and the rest in pension pounds.
Now that’s a fiduciary model that brings real simplicity to the market.