The picture shows the current view of member behaviours in DC and it’s been around long enough for us to feel reasonably confident that it works .
The diagram promotes investment strategies that suit the needs of the three member segments (previously referred to by Emma Douglas as “Bunnies, Bears and Badgers”).
Since the majority of people are happy to accept the default investment strategy, it shouldn’t surprise us that the majority of people are happy to let someone “do it for them” when they buy an annuity .
While the pensions industry has deliberated about what a default savings strategy should be and how to build funds for the blue group and offer funds for the orange group, they have paid scant attention to what happens to these funds at retirement.
Joanne Segars, chief executive of the NAPF highlighted the problem of retirees not shopping around arguing that…
”…lower and middle income workers are especially vulnerable – too many end up stuck with the wrong annuity at a bad price.” Most retirees retire with a fund of less than £50,000, with the average being under £30,000. Often this is not enough for insurers to make any money from consultation over which annuity provider is the best for them. The NAPF says ‘few people’ know enough about annuities to find the best deal themselves
The question I’d be asking myself if I was a Regulator with a DC hat on is how to get the pensions industry to pay attention to what is belatedly being called a billion pound scandal.
The trouble is that there is no commercial reason for companies or their advisers to be bothered.
Companies can argue that they have selected, monitored and contributed to its staff’s DC pensions for their working lifetimes. It is none of their business what the staff do in retirement.
Advisers can argue that they are working to their client’s agendas and companies pay their bills. DC Trustees and governance committees generally follow an adviser’s agenda. While there is plenty of money advising on funds (especially if you can get a trail comission), advising on annuity purchase offers small returns on hard work.
Nonetheless , it’s still amazing that such large sums of money are getting so little attention. Can you imagine any other area of our life where a cash accumulation of £50,000 could be treated with so little interest? Think of the anxiety of the contestants of the Million Pound Drop or Millionaire over a potential loss of £10,000 of their pot?
The supine behaviour people adopt when faced with At Retirement decisions is an unfortunate result of the defined benefit culture prevalent in British companies. People have got used to their company and their trustees taking care of pensions and they do not consider it is their job to organise their retirement income. Companies have been to point out that their pensions are no longer guaranteed, to offer modellers and education along the way and this only adds to the problem when staff get to retirement with not much more than a “leaflet promoting a price comparison site” to help them chose their pension.
The NAPF don’t mention it in their press release but the percentage of people shopping around to buy an annuity from an occupational DC plan is lower (25%) than the numbers shopping around from a personal pension (33%) – not that 33% is anything to be proud of ABI!
This has got to be a serious worry. The combination of large sums of money, employers and employees leaving it to each other and regulators off worrying about other things has meant that we are pouring our champagne down the drain – the title of a presentation Jenny Davidson and I gave to the NAPF on this very subject (you can look at the slides if you scroll down the right hand bar on this blog).
What really is concerning is that we are now in the bulgiest part of the baby boomers retirement bulge. We are 61 years from the end of the second world war and the consequences of the lads returning from the wars are retiring as I write. There is an urgent need to reform the way we convert our DC pensions to cash. Here are the five things that those in Government could do to help.
- The DWP, the Pension Regulator and the FSA should call the ABI, the NAPF and key At Retirement advisers such as Alan Higham and Tom Mcphail into a working group
- The DWP’s small pot initiative should concentrate on the DC retiree and the issue of finding orphaned DC pots (company and personally generated)
- The Pension Regulator should promote “decumualtion” as the most urgent rather than the cinderella of its 6 DC outcomes
- The FSA should strengthen the insurers’ TCF obligations when providing default annuities. For instance to require potential purchasers to complete a medical questionnaire and declare that they have explored the open market option.
- Once all parties have established that this is tinkering around the edges, perhaps we can then get on with establishing a proper national model for collective DC
- Annuity sales ‘unfair and opaque’ (bbc.co.uk)
- Pensioners in £1 billion annuity rip-off (telegraph.co.uk)
- ‘Unfair’ annuities cost elderly dear (independent.co.uk)
- MANCHESTER – (that’s where the answers are) – NAPF2011 (henrytapper.com)
- Sorting the pensions of the “squeezed middle”. (henrytapper.com)
- ‘Toxic’ annuities cost us £1bn (telegraph.co.uk)
- F1rst Briefing – Annuity Reforms (firstactuarial.wordpress.com)
- Perverse incentives; Sexycash or prudent pension? (henrytapper.com)
- Confused.com now compares annuities (confused.com)
- Will new annuity rules boost retirement income? (confused.com)
- Retiring workers warned of £1bn pensions rip-off as hard-earned savings are cheated by ‘murky’ industry (dailymail.co.uk)
- Annuities explained: get more pension income (confused.com)
- Annuities made simpler with new ABI guidelines (confused.com)
- Boost your pension by 40 per cent (confused.com)
Great article as usual, Mr Tapper and great suggestions too. But isnt the real solution to educate and engage scheme members in their own pension planning. This idea that the govt., regulators and the pension industry can fix this ‘£1bn annuity scandal’ while DC members remain oblivious to how their pension/annuity works is surely not fit for the 21st century. But then again, what do I know about pensions, I’m only 29.
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