I’ve been doing some work recently on “fund-mapping” as trustees worry how to merge their DC pensions. Many of the GPPs I’ve been looking at have over 200 fund choices, not surprisingly, most of these choices are unused with 90% of contributions being channelled into the global equity, long dated gilt and cash funds used in lifestyle.
I’ve also been going racing. Even as a fan of horse-racing, I am often confronted with the choice of 28 or more horses which all look very fast and very similar. I have no more confidence in chosing the right horse as I have of chosing the right fund.
Thankfully, when I go racing I have the option not to bet, an option that I take more and more!
The DC investor has no such luxury. He or she has to take decisions on the management of their retirement fund with little more competence than me at the racecourse.
I will extend the analogy..
- Do I back the favourite (the default) or chose an outsider (emerging markets looks like he could run a good race)?
- Do I pull my horse up early and take early retirement?
- Do I enter a long-distance race and take late retirement?
- Will my horse have the stamina or speed to judge getting to the winning post at just the right time – the lifestyle glide path?
Even the annuity decision has its analogy on the racetrack. When you place your bets you get a choice of odds and a choice of ways to bet. I have seen people walk up to a bookie offering odds 20% below the odds on the next stand and place their bets at the lower price.
Sometimes I have seen 50% differences in the tote price and the starting price with the fixed-odds bookmakers– not to mention the greater efficiencies that can be obtained by using internet betting sites that can give you pretty well the bookies odds!
This is precisely what is gong on with annuity purchase!
Most people on the racecourse haven’t a clue and they leave the meeting shaking their heads with the correct impression that the odds are stacked against them and that betting is a mugs game.
People feel the same way about DC pensions.
Of course with pensions the outcomes are not so polarised – you don’t lose all if your horse doesn’t win. But the stakes are much higher – when you annuitise you are betting your standard of living for the rest of your life.
Today HM Treasury introduced a £20,000 minimum income retirement on those looking to drawdown their pension as they choose. This is a senible precaution which prevents “double dipping” the practice of blowing your pension to drawdown on the State. It is also an indication of how far most of us are from avoiding annuitisation- it takes some £400,000 to provide a level pension of £20,000 pa.
The Government are saying, as the Irish Government said some years ago “do it yourself is you like, but you provide the safety net”
I am not arguing against DC – we are not able to return to defined benefit for all (other than through the basic state pension).
I am arguing that we need to construct a “no-choice” DC architecture that allows people to save for retirement without taking choices that they feel unqualified to take. And we need to make this available to those below the “Minimum Income Requirement”
We need to concentrate our thinking not just on getting DC accumulation right, but on giving people an option when they decumulate their DC pot, a choice that works as efficiently as the decumulation of DB plans.
In order for that choice to emerge, we need to look to collective accumulation through target date funds and collective decumulation through the employment of well run glidepaths that spread investment and mortality risk across the hundreds of thousands of us who will be retiring each year from DC schemes.
- Retirees given greater say over pension pot (telegraph.co.uk)
- Don’t Fall for This False Retirement Promise (fool.com)
- Treasury to unveil annuity bill (bbc.co.uk)
- Couples urged to buy joint annuities (confused.com)
- Annuities explained (confused.com)
- Annuities: How to protect against inflation (confused.com)
- Bookmakers attack horseracing industry in levy row (telegraph.co.uk)
- New Ways to Protect Your 401(k) (online.wsj.com)
- Retiring: Tax Tips (turbotax.intuit.com)
- When Target-Date Funds Diverge (online.wsj.com)