Defined Ambition – the way to properly sort UK pensions


Defined  ambition is no more or less than  this; it is  a way of turning round systemic problems with our pensions.

For DB it is about salvaging something from the wreckage created by the unfettered growth in guaranteed benefits that prevailed from 1984 on.

For DC, it is about moving on from the vision of personal pensions, of individual empowerment and member choice and returning to an older set of values that re-embrace the mutual principles on which insurance is built.

There can be no moving on unless we accept that we cannot have absolute certainty without beggaring our neighbour. For civil servants , who are the architects of the DWP’s latest paper on DA, to argue that the people of this country require more certainty of outcomes is solipsistic.

A solipsism is an idea born from the viewpoint of its creator(s) , it is incontravertible because those who are solipsistic will brook no views but their own nor see other viewpoints. Civil servants crave the security of certainty, enjoy the security of certain pensions and argue that because they are driven by certainty, so is everybody else.

But this is not the case. Most of us do not have jobs for life nor pensions that replicate jobs for life certainty in retirement. We live at work in fear of redundancy , ill-health and the need to pack work in to look after others. In retirement we live in fear of inflation and the need to pay for nursing fees as we become decrepid. We do not crave certainty, we crave money, enough to afford some form of inflation protection on our pensions, enough to leave our partners something if we die before them and enough to provide dignity for ourselves if we are no longer able to function – in mind or body.

The ideas put forward by Steve Webb and Alan Rubenstein in Pension Income Builder provide certainty, the certainty of low incomes in retirement. They are neither ambitious or new, they simply cobble together aspects of the current financial apparatus. They re-arrange the deck chairs but do nothing to save the ship.

The ship can be saved and will be saved, it is only a matter of time till we understand what is needed for salvage but let me spell out what I think will happen to fulfill the defined ambition and then let me ask the civil servants and Steve Webb and Laurence Churchill and Alan Rubenstein how long we are going to have to wait until it does.

For the sake of brevity, I will not focus on sorting out DB but look at DC- it is after all the pension savings system of the majority and the system most in need of help. The lessons for DB are ultimately the same- more pension- less certainty and a certain amount of “pulling together”

So off with DC then…

Firstly we need to address the rotten state of the annuity market. I remarked on the FSCP’s excellent paper on the confusion among consumers and the poor value many receive when coming to buy a pension with their pension savings.

We can do something to reduce the confusion, improve value and restore some confidence but until we recognise that a system of individual annuitisation that underwrites everyone, offers less value than a communal system based on collective insurance, we will have no competition and no real pressure on the insurance sector to smarten up its act.

I call upon the DWP to recognise what is inherent in GADs own annuity conversion table, namely a differential in annuity conversion factors between individual and collective annuity factors of some 50%. This is incidentally the imputed added value that the RSA’s Towards Tomorrow’s Investor’s paper gives to a move from individual annuities to the Dutch system of collective DC.

IF the DWP recognise the validity of its actuary’s own computations, then they must recognise the need for a collective approach for those in DC and the absolute value of encouraging DC plans-whether mastertursts or GPPs to offer collective decumulation.

I say “encourage” rather than “allow” because there is nothing stopping NEST, NOW, Peoples, Legal & General , Standard Life or any other workplace savings provider from setting up a collective DC scheme under trust  to receive transfers from other DC pensions and to provide a pension for those already using such a scheme to accumulate.

There is nothing stopping those who run these schemes other than a failure of nerve, a failure of governance. So I challenge Adrian Boulding, Jamie Jenkins, Morten Nilsson, Tim Jones , Jamie Fiveash and the others who own the workplace propositions on which auto-enrolment will be judged.

Why are you not offering a collective decumulation option to your members?

There is no regulatory reason why you cannot say to those who are retiring, bring your funds to us and we will invest them and pay you a pension. You can do precisely what the Dutch do and bring the efficiencies of the Dutch system into play. If you  are operating in an occupational environment, you will not be subject to EIOPA’s Solvency II regime and even if you compete in an insured environment, you will have no underwriting costs, will be able to invest in real assets for longer and can run a pensioner payroll so much more efficiently than the current system of individual pensions in payment.

There are sound commercial reasons for these providers to provide proper decumulation. I will here extend the network of providers to include Zurich, Fidelity and BlackRock who are not mainstream auto-enrolment players but who have major DC aspirations.

What you need if you are running a DC proposition is assets, unless you run a NOW type charging structure, your only way to recover costs is through the AMC. To make a profit you need huge inflows of funds, this can be achieved over time by contributions but immediately, life is made easy by transfers.

If insurance companies could be convinced by Government that a collective DC approach would attract sufficient transfers, they would do CDC overnight. There are two immediate gifts in the Government’s shopping trolley. The first is the 90,000 failing DC schemes that look vulnerable from the charge cap consultation. The second are the pots that follow members under impending legislation.

There is alignment of interest here and when that happens, we can get change.

There is one further reason why pension providers may want to help. Some of them, believe it or not, really do feel they have an obligation to the people who save with them , to provide better pensions. Again there is commercial advantage. If employers start thinking about retirement options, then the pension scheme that helps staff to retire when the staff (and the employer) want them to retire, they will choose providers who have gone the extra mile. , offers employers the opportunity to weight the “at retirement” offering of the provider. To date, few employers have given this a high rating – that could change.


But there are huge obstacles to the mastertrusts and insurers adopting collective decumulation.

Firstly, they are petrified of longevity. Who insures the long tail risk of people living too long (especially in expensive nursing homes)?

Secondly, what happens when investment returns do not meet expectations and real or even nominal pension levels cannot be maintained. Who is on the hook?

Thirdly, why change from the cosy annuity system we have today with its kickbacks between insurers, untroubled margins and relatively low distribution costs.

This is where the Government has to act. It has to act as it did with consultancy charging and is now with trail commission, hidden charges and the absolute charge on the default.

It needs to be as decisive in exposing the poor parts of the annuity market as it has been in exposing the deficiencies in pension savings.

It has the opportunity to strike when the FCA publishes its thematic review next year though the paper yesterday demonstrates there is need for immediate intervention.

And while it hits the failing annuity providers with a stick, it should be offering a carrot to those DC providers capable of managing collective decumulation. Transfers is the carrot.

And a UK Government can do what the Americans with their ERISA legislation have done and protect providers who act with best endeavours from litigation. The safe harbour rules in the USA allow providers to be more ambitious than taking a “risk-free” approach and free up fiduciaries to act in the best interests of members- not just to protect their own bottoms.

If , as I suspect, the reason we are not getting collective decumulation today is a failure in governance, this point is particularly relevent to a Government strong on nerve and light on cash.

Finally, Government can promote the advantages of a collective system against the advantages of individual annuities. They can give a simple message to people taking decisions. Buy a guaranteed annuity by all means, but be aware of the alternative.

If the numbers are presented responsibly, and people are made aware that collective decumulation runs the risk that pensions in payment can go down as well as up, then people can make real choices between one system and another.

Then it is a question of defaults. A Government that believes in mutuality and collective dependency will default the collective decumulator, while a Government that believes in absolute certainty and individualism, will default the existing individual annuity system.

We are some way from being able to make those choices. We have not even got the choice to make- yet. But the DA debate is about whether we can make those choices available and so we have to be pleased we are having it.

About henry tapper

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