Here’s a letter I’ve sent this morning to a civil servant who is listening to the various people hoping that we will at last get proper pension reforms that ease the lot of the squeezed middle and restore some pride in our crumbling private sector pension provision. It has a few references to other documents which I can’t publish and references to various people who quite publicly have called for change. I don’t speak for them, I speak with them.
I’ve read Derek’s paper and I’ve read the 2009 GAD paper and it will be of no surprise for you to hear that I am 100% in agreement with Derek, not because he is a colleague but because he has a much more important connection common sense.
You say that DC will produce very uncertain outcomes but we contend that the DC outcomes will be certain – guaranteed by AAA UK bonds, SolvencyII, FSCS, et al. They are certain to be much lower than they could be without the cost of the protection that has done for DB and will do for DC.
There is an assumption within Government that the level of retirement income from annuities must be protected. As Derek points out, this is inconsistent with DC accumulation but also with income drawdown. I struggle to understand what the public policy justification for the need for guarantees actually is. It may be hard for those who have been protected by defined benefits throughout their career to empathise with the level of uncertainty that the rest of us live with.
Our primary asset is our capacity to earn, this is sometimes protected by PHI but often not.
Our secondary asset is the equity in our house which some believed could only go up and which is currently being protected by artificial interest rates.
Otherwise we have some financial security from directly held equity in businesses ~( no protection) and cash which is wasting away as a result of the Government chosing to protect the value of housing.
While the Government chose to insure the pensions of public servants on our common balance sheet, it seems fearful of accepting any form of risk from DC. The concerns that we hear about the Dutch experience are groundless. Even with the anticipated reductions in pension income that many Dutch people in their CDC system will have to suffer, the total income they are receiving from their DC accumulation is still well in excess of their British neighbours.
I was speaking with a group of Dutch people on Thursday night about they and those that they know are bearing up to a real cut in their retirement income and the impression I got was that they accepted this as a necessary consequence of that part of their retirement income being market-related. Bearing in mind everything that we in the squeezed middle get is market related , I see no reason why we cannot be equally sanguine about our pensions provided – our expectations are properly managed.
Here the with-profits endowments analogy makes some sense. Annuities are non-profit and non-profit endowments went out because the cost of the guarantee was unacceptable.Iinitially people chose to pay lower premiums in return for a market related endowment on a with-profits basis. The problem, as Derek has pointed out was that with-profit pay-outs were distorted by unscrupulous marketeers who over-distributed and by poor sales techniques which failed to point out the risks that with-profits took (relative to non-profit).
You mentioned that there should be a default position (on mallowstreet). I have argued that there is a default decumulation position, it is a level single life annuity provided by the insurer that managed your pension accumulation. This is a “pot-luck” position and many are buying appalling annuities as a result. This is at the root of what we, Robin Ellison, Con Keating, Alan Higham , the AMNT and Kevin Wesbroom, (to name but a handful of those calling for change), are trying to address.
The social injustice of weighting the pension agenda towards public servants and the low paid at the expense of those who are increasingly relying on DC is astonishing. I am quite sure we will look back at the past few years (hopefully not the years to come) as years of astounding complacency by those in Government who have completely failed to come to terms with the seismic shift in private sector pension provision that Derek’s graph and paper so well charts.
So what are we proposing – we don’t all have the same method but we have the same aim, is to use the power of collectivism to create a national mutual which pays better pensions as the default decumulator of our DC pots. I contend that the default annuity position should be a state run scheme pension , backed – if backing is needed – by the PPF (Con would argue it should be off-balance sheet and effectively be a pension gilt).
I agree with you that industry wide schemes are not going to be able to pull this off and here we have something to learn from the Dutch, It’s beyond me to work out whether the pension pounds that people earn from their DC accumulation should be paid from a collective fund or as additional state pension from the Treasury…the latter seems more efficient, the former more acceptable to those who have memories of what happened to SERPS.
Either way, a national solution to the annuity problem, if only for a part of the problem (we can limit access to “Government pension pounds” as we do Premium Bonds), is what is needed. Andy, this isn’t a new position. I first argued for state support for the smaller annuitant in a paper called Pension Pounds which I wrote in 1999. As Kevin Wesbroom has pointed out, there has been no structural advance in DC in the 35 years he has been advising on it.
It really is time that Government sat down with us and looked at the proposals that Derek has spelled out and compare it with Con Keating’s solution and those put forward by others. The answer to this problem does not rest solely with the DWP or GAD or the Treasury. It needs a public/private partnership. It is us, the private sector who need the help and our beef is that it is you, the pension privileged public sector who are standing between us and a better way of getting our private pensions.
People like us are not going to shut up so can we be allowed to organise a proper public debate (call it a symposium) where the aforementioned can petition our minister. I have a budget to organise it and I believe the capacity to bring the various parties to the table. Can you be the portal to Steve Webb and the civil servants at GAD, DWP, tPR and Westminster? I hope that we will be able to take this forward without delay
Yours in anticipation
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- Will new annuity rules boost retirement income? (confused.com)
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- PPF II -opening the door for a better DC (henrytapper.com)
- Should men claim pension benefits early? (confused.com)
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- F1rst Briefing – Annuity Reforms (firstactuarial.wordpress.com)
- Yes – things are this bad in DC land! (henrytapper.com)
- Annuities: How to protect against inflation (confused.com)
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