In the DC garden, all is not a bed of roses

I’ve been reading the latest report from the Friends Life Workplace Savings Index which you too can  read by pressing this link.

The report is powered by DCisions, an organisation that crunches numbers and produces reports on people’s pension investments.

I like the idea of an insurer reporting trends across its DC book, I only wish that DCisions had been asked to report on the DC outcomes as well as the progress of the default investment strategies employed.

The good news which headlines the report’s findings is that those closing in on retirement have seen a 14.2% return on their investments, considerably more than they’d have got from sticking their money under a mattress and the best part of 20% more than those who invested in world stock markets over the same period.

What the report doesn’t say is that these high returns are only compensating for the increased cost of buying an annuity. Investors are not better off if the measure of being better off is that they get better pensions, they simply haven’t lost out as they would have done if they had been stuck or worse still shares.

Which is a backhanded way of saying that the “much-maligned” lifestyle strategies which ensure that people are invested in gilts prior to purchasing an annuity – are working.

This may give the boys in Life Company Head Offices some reason to be cheerful but it leaves me perplexed and as I’m one of those saddoes who reads these reports, then that should be a cause for concern.

Why I am I perplexed?

Well first of all I’m not sure whether the general public (even were they reading this report or reports on this report) would be delighted to know that some of the pension they have lost (from annuity rates collapsing) has been salvaged by their investment strategy.

Friends Life are culpable in this respect. It is not good enough to make an announcement that people will be better off by 14.2% when they will in fact be worse off.

This is yet another example of pension providers obsessing about capital accumulation and forgetting what they are about – providing pensions. People with Friends Life pension plans, even if they are fortunate enough to have been protected by the lifestyle process, are not going to be better off and to tell them they’ve done well is pretty damned dumb.

Many of the people who may be in Friends Life’s estimate within the two years of retirement to qualify them for congratulations, may not be anywhere near retirement or , more relevantly, of drawing a pension. Friends Life’s records are based on what a member told them when they applied to join the pension plan and typically the member of a default investment strategy, didn’t tell them very much. They signed an application which almost certainly had a default retirement age pre-populated on the application form.

Now they may have registered what this retirement age was at the time, but whether this is something they remember today and whether that age has any relevance to their current circumstances is very much open to doubt.

What is not in doubt is that when these people get their pre-retirement packs (usually six months before the retirement date that Friends Life have recorded) , they will not be jumping for joy.

It really is about time that we stop peddling spurious optimism as the Friends Life Workplace Savings Index peddles it.

The only meaningful numbers people want is what their pension is likely to be and this needs to take into account not just the investment return but the cost of the “money purchase”.

While the point that lifestyle strategies are currently working in pre-retirement planning is well made, it is not the headline.

Friends Life should concentrate on DC outcomes – eg the pensions people get and not the returns on the default investment strategy. They should be turning their attention to the alignment between the selected retirement age and the point at which the annuity is purchased. Finally they should be listening closely to the feedback from those annuitising and establishing whether they understand what is going on.

Let’s not get carried away here, I doubt many people read this survey and I suspect that those who do haven’t the slightest concern about the issues I am highlighting (being in DB plans for the most part). However, if the life companies and the ABI who are their mouthpiece, think that all in the garden is rosy, they should take it from me – it’s not!

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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