Guaranteeing second rate outcomes is not ambitious!

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Let’s get the issue in focus; defined ambition is not about giving people certainty about their pension savings, it is about being more ambitious about the outcomes they get for saving. For employers who are prepared to make a pension promise, we need to do  redefine “promise” in terms of best endeavours rather than guarantees, for employers embarking on funding their staff’s pensions- no matter how low that funding- this is about making the money they put into member’s pots- work efficiently.

Right now employers who put money into their staff’s DC pots cannot be sure the money will efficiently purchase a pension. We need to change that if auto-enrolment is to sustain its initial promise.

Similarly employees need to feel that giving up earnings today for a pension in the future- is worth it. If they don’t they won’t pay the much needed voluntary contribution- they may opt-out. We need to get more ambitious!

The “lock-down” of DB is a failure of ambition. It converts mutual endeavour to the logic of the accounting room. The lock-down of DC is just as bad – it converts equities to gilts too early in the lifecycle and requires guarantees for which annuitants pay too much for the value they give. Finally the annuity purchase mechanism is so clumsy that it has become a national joke (if the loss of pension involved can be thought of as funny).

We do not have to start again. We have 95% of the apparatus to make our pensions work, we just need the Government to encourage the last 5%.  To demonstrate what I mean, let me give three case studies, one a large employer sponsored proprietary DC scheme-(Lloyds Bank’s for instance). Secondly a large master trust with target dated funds (NEST for instance) and thirdly a common or garden GPP (Leg’s workplace savings plan for instance).

Case Study one –     large single employer occupational pension scheme.


The employer wants pension contributions to buy more     pension without taking on extra risk; the trustees currently invest in a     lifestyled default and members buy annuities at retirement with some help     from a broker.


The trustees engage agree that from the point a member     wants to draw down an income they will absorb the member’s fund into a     common investment fund and pay a scheme pension to the member at a     pre-agreed rate.  At the employees 90th     birthday, the trustees will purchase an annuity for the member based on     investment returns and the prevailing annuity rates

What’s good about this?

It’s efficient as the employer already has a pensioner     payroll and an investment apparatus (for DB assets).

This has minimal extra risk for the employer.

It provides considerably more pension upfront as the     conversion factors of cash to pensions are based on scheme pension rates (laid     down by GAD)  which are approximately     35% better than individual annuity conversion factors (laid down by GAD)

The annuity conversion at 90 only impacts those     surviving. Studies by David Hutchings and others suggest that annuitisation     at this lifepoint is currently efficient. The scheme can of course change     the annuitisation point or dispense with it altogether. The point is that     the agreement is based on trust between employer and trustee and member     based on “best endeavours”.

What’s bad about this?

It will not provide the absolute certainty of individual     lock-down. It is far too simple for the lawyers, it cuts out several layers     of intermediation and it relies on trust between the employer, trustees and     members.

Case Study two – GPP.


Most GPPs invest in equity funds which phase into gilt     and cash funds on a glide path to the annuitisation date (lifestyle). At     the appointed date- set by the employer, the money is converted to a     pension using an annuity or individual drawdown.


The default position switches from  annuity purchase to a transfer to a collective     drawdown fund (an example being Alliance Bernstein’s Retirement Bridge     product. This works in the same way as the occupational scheme and income     is set at the GAD scheme pension rate rather than the individual annuity     conversion rate.

What’s bad about     this?

As with case study one, it relies on a degree of trust     between members and NEST based on the NEST investment team making their     best endeavours. Clearly there may be additional perceived risk since there     is less employer involvement but in reality there is no employer obligation     to bail out its pensioners either way

Case Study three –     Mastertrusts  (NEST)

Current   NEST accumulates member pots in     target date funds. These funds mature at a given date in the future (2030     for instance) and it’s planned that at this date- selected by default at a     member’s most likely retirement age, the member buys an annuity or     individual drawdown plan.

Future       The  target date is the point at which the fund     switches from accumulation to decumulation and starts paying a pension.     Again the pension is paid at GAD scheme pension rates. Again there is a     target date for annuitisation at which point the fund is wound up, for the     sake of consistency , let’s say this is the 90th birthday of the     fund members.

What’s good about     this?

Members get 35% more pension and there is minimal     disruption (no switching of funds at the pivot point between accumulation     and decumulation (one of the structural advantages of target date funds).

What’s bad about     this?

As with case study one, it relies on a degree of trust     between members and NEST based on the NEST investment team making their     best endeavours. Clearly there may be additional perceived risk since there     is less employer involvement but in reality there is no employer obligation     to bail out its pensioners either way

If we are to leave pensions to the lawyers and the accountants, we will not have ambitious pensions. Instead we will continue to have the current lock down.

The great British public has got to decide if they want to have the current system- which provides certain outcomes but little prospect of value, or a more ambitious system that exchanges absolute certainty for the prospect of considerably more value.

We argue that if you are going to have gilt based pensions, pay more taxes and get your pensions from the state. If you are going to have private pensions, trust the private sector and don’t shackle pensions as they are being shackled by the current system of lock-down.

We need choice, giving people the choice between efficient gilt-based (the basic state pension) and inefficient gilt-based (individual annuitisation) is no choice at all.

The proposals in this blog are not costed and need a lot of work on them, if that work is carried out by those who have no ambtions, my proposals will end up with all the other proposals, in the DWP’s waste paper bin. But if the DWP and in particular Steve Webb, are prepared to be ambitious, I think they will find my proposals refreshingly workable!

About henry tapper

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