Not what’s in the pot but what it buys – Pension RTI

pensionerWe have got used to thinking about our DC pension pot as a cash value because that is how it is expressed on the statements we receive from the pension administrator.

If I were to get a DB statement, I would not expect my pension rights to be expressed as a cash amount (unless I ask for a transfer value).

I’d expect my DB statement to show my projected pension. I know it’s a guesstimate and that inflation could eat into the value but at least I know roughly what I’ll be getting

But when I get real-time information on my DC pension, I get a cash value – why?

What matters, we are all agreed is not what a pension pot  is “worth” but what it “will buy.

I got a statement last week. A snapshot of my DC holdings at £100k today is meaningless, what will it buy in 2027 when I want to draw an income?

Forget about future contributions, were I purchasing an annuity today as an average Joe at 67 , what would I get as a pension?

You see they don’t want to  tell me, they’d have to know the type of pension I wanted, know my state of health , my postcode and how many clubcard points I’d earned in the previous two years (ok I made that last one up).

Frankly you’d be reluctant to tell me the bad news (which is that my £100k even as late as 67 will get me about £4,250 pa (DB equivalent pension). I need at least £500,000 to be at the races in terms of the pension I will need to retire (I have many mouths to feed). I need to be saving at least £10,000 a year more than I am to get to where I want to be. I need a new job, a new lifestyle or new expectations.

I did this maths this weekend because I went to a talk last week where serious people were getting real about these workplace pensions we are either joining ,setting up or advising about. The seminar was about something called “GO!” , offered by Hymans Robertson who are a very smart pension consultancy.

GO talks about “Future-Proofing your pension”; giving you some certainty about the future by either empowering you to take decisions today or taking control of your pension planning (right down to organising how much you pay each month).

So that you can be pretty sure that whatever your level of involvement you have a plan that gets you what you want. And of course what you want is a replacement for your pre-retirement income, in the shape that suits you when you get to the end of the working road.

Oh and you’d like a side-dish of cash? Certainly Sir, that can be arranged but the main course? – A replacement income? We’ll be back with the menu.

Knowing what your DC pot is worth at 30 or 40 or 50 is frankly not that relevant. Just as with a DB plan, you need to know what you’ll be getting at 60 or 67 or 75 and that’s what’s so hard to predict.

Dr Debbie Harrison was speaking at the GO event and I had a conversation over the weekend over who should be accountable for the outcome of the DC pension.

Debbie’s view is that accountability rests with the fiduciary the person who does the governance,  the person who sets and exercises the rules. As Debbie pointed out to me, that could be the Government, the insurer, the trustees or an independent committee set up by the employer. “Too many cooks” with the likelihood of confusion.

What is clear to Debbie is that while we are able to tell people what they will get today (with provisos about annuity rates), we have no wish to. The news is too horrible – people feel they would be donig more harm than good.

I’m sure that this is right, if the information is dumped on people in the wrong way. Simply telling people their pension plan is inadequate without giving them help to make it work is not helpful.

Much of what GO is about is making it possible for employers (who have plenty to lose if people can’t afford to retire) to speak candidly with staff about what retirement will look like and help their staff back onto their feet.

I think Hymans are right to give the employer the Fiduciary role, I cannot see any other agent being able to have those tough conversations, employers do tough talking with staff.

The alternative version of Pensions RTI is  to tell people to get enrolled and everything will flow from that. This seems to be the Government’s chosen role.

And of course everything will be alright if enough money is invested in the right way to buy the right pension at the right time. Which is what “future-proofing” is about. But that needs some tough conversations between an employer and staff.

It is not alright to enrol people and leave it at that.

Let me paint the picture of what a future looks like if you put off the conversation with your staff (and/or yourself).

Over the years between now and retirement, the bad news will start building up.  There’s going to be a “future-proofing bill”. It’s imaginary but no different from most of the other bills that arrives (as it will be ignored).

If that bill is ignored there is going to be no pension at the other end (to meet expectations).

The Future-Proofing bill is the contribution needed to be paid to keep your pension on track to meet your retirement expectations .

It will fall on your  fantasy door mat every year as it falls into the genuine post-trays of employers with DB plans.

You would  not look forward to the “Future Proofing” bill arriving through your letter box, because if you expect to get yourself and your family a replacement retirement  income of more than 30% of your income,  it will be one of the biggest bills you would  get.

If you ignore that bill , next year’s will be even bigger and so it will continue.

The Future Proofing bill may look like a payroll-busting 15%+ of your salary every year till retirement. Retirement may have to look closer to 75 than 65 or else you are going to have to seriously lower your expectations.

For me, the Fiduciary process starts with “expectation management” and that is a really tough conversation to be having with your staff. Telling people that joining a pension plan with a 1 and 1 contribution structure will be enough  is not having that conversation.

Getting people to sign up to a service that takes an imaginary bill into a real bill that gets paid by payroll deductions is a huge thing. But I believe people will sign up to this kind of “Future Proofing” if you , the employer, have the conversation.

Enrolment is not enough, people need to get wise to the real pain of pension provision and start thinking about pension contributions like they think about the rent or the mortgage payment or at the least as the HP payments on the car.

And  telling someone that their pension is “worth “£10,000 or £20,000 or even £100,000 is not having the conversation, because that is a meaningless number. Telling them that £100,000 will buy them at 67 £4,250 pa DB equivalent pension is a tough conversation but it’s a real one. Slide the cursor back and see how that £4,250 number falls if the pension is paid from 65 or 60 and the conversation becomes tougher still. And how many people have £100k in their DC pots when they get to 52?

Providing DB pensions is really painful. companies have to make tough choices, many jobs have not been created so that DB pensions can be paid; plant has not been developed, research not been carried out, dividends have been reduced so that pensions are paid,

So why are we shying away from these tough conversations with our staff?

Because we have given up on DB , do we thing the problem has gone away?

It hasn’t, in fact it has got worse. The cost of that DC pension pound is probably 40% higher than the DB pension pound (simply a matter of efficiency). The payments into the DC pots are less than half into the DB pot.

Much can be done to make DC move towards the efficiency of DB so that the cost of the DC Pound converges on the DB cost but that doesn’t solve the funding dilemma.

Thank goodness firms like Hymans Robertson are talking about future proofing in terms of having that conversation, delivering proper information on the state of someone’s pension planning and offering a management service which furture-proofs people’s retirement income.

This is real Fiduciary Management. Firms who embrace this kind of program will need to be robust with their staff about what such programs mean.

They mean facing up to the reality that what has happened in the past almost certainly puts people behind relative to what they want for the future and what they have to do in the future may mean trading down on the car, not moving to that posher house and having to work for longer for less (net pay after pension contributions).

The sooner  we start having these conversations the better and as a first step we can stop giving people false hope by quoting telephone numbers at them by way of cash accumulation.

It is not what your pension pot is worth that matters, it’s what it will buy. Right now pension pots don’t buy much, let’s hope things get better.

But we must start with today and progress.

Progress means talking straight with people, it isn’t always  pleasant but it has to be done.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to Not what’s in the pot but what it buys – Pension RTI

  1. Martin says:

    I can see the point about people needing to know what their pension pot will eventually buy. But any such projection is bound to be clouded by assumptions and more crucially it might go up and down. People take comfort from knowing how much they have put away – a current value, and from watching it grow steadily over time thereby offering a sense of achievement. Similarly savers probably get more utility from opening their ISA account balance statement every year than from calculating what it “might” be worth in 15 years time. For the most part the satisfaction is just knowing it is there!

  2. henry tapper says:

    There’s a difference for me between the nice to have “savings in an ISA” and the must have “income after you stop working”. It may be that savings can replace income for some people, but most people need a regular payment to supplement state benefits and it’s that “replacement ratio” that I’m banging on about. It’s something very British and something we should be proud of, but we do have pensions in this country and not just retirement saving!

  3. Joe says:

    Henry, you say everything that needs and must be said about a pension v an ISA.

  4. Well Henry what I say to someone on, say, £20k a year who probably would be happy with £12k a year income in retirement (let’s not mention inflation yet) is as follows:

    Firstly, you should get a State Pension of circa £7,500 a year (in today’s money terms). So that leaves a gap – ‘Mind the Gap!!!’ of circa £4,500 a year. Now you are going to need around £100k saved up to buy that if you were retiring next week (and more due to inflation etc. but leave that for now, as let’s not really scare the pigeons).

    Then I say well what if I can arrange for your generous employer and the tax man to contribute most of the cost? (or whatever it is – I guess it could be less with minimum Auto Enrollment levels, but not in my Scheme).

    Then your £100k target fund may actually shrink to £40k in terms of net contributions (after tax relief and employer help). Better still, build in some investment returns and you might actually only need £30k or so in net personal contributions!!! (depending of course on the time frame and the investments selected, as well as how much is skimmed off by managers, advisers and some consultants or IFAs – although that may soon be a thing of the past, hopefully. But we won’t dwell on that!)

    So instantly we have made an enormous task seem like a possibility and worth pursuing. Of course we need to be honest about future earnings and inflation and mention this but many folks out there are experiencing no salary increases, and your personal inflation depends on what you spend your money on.

    The point is many of our typical average employees will have mortgages paid off by the time they retire (or very little outstanding hopefully) and should have another boost from not having to save for a pension anymore, or to pay National Insurance – although that could of course change in the future. Perhaps less money spent on commuting, buying work clothes and lunches out, eh Henry?

    Anyway, let’s not be too negative about pension saving, and with the new world of much less ‘means testing’ and more of your saving actually helping you in retirement, we can at least be more positive about the message that it pays to save now, and the target may not be that daunting after all!

    Now I must go and clean the Jaguar….

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