A few house rules…


Once you’ve blown up the building you let the dust settle ,you announce what you’ll be putting up instead and then you build.

This seems a reasonable analogy for what is happening in pension reform. The FCA are issuing invitations to the great and the good and hastily convening working groups. It feels to me that neither the DWP or the FCA (let alone tPR) were given much notice of Wednesday’s announcement, which is as it should be, sometimes Government has to be sure footed enough to reform without consultation.

So the rebuilding begins.

These are a few house rules that should underpin any discussions.

  1. The interests of the individual in retirement are paramount. This should be the “treating customer’s fairly” equivalent.
  2. Equal opportunity for all– those on low incomes , those without access to advice and those with limited financial literacy need a hand up to get to the level of the better off
  3. Whatever consumer protections apply to pensions in accumulation, should equally apply in decumulation
  4. Every effort should be made to remove conflicts of interest – non-conflicted advice or guidance means de-linking product-bias (no commissions, no vertically integrated advice)
  5. Any advice or guidance given needs to be underwritten by some form of professional indemnity insurance or Governmental equivalent.

This is not a plea for any vested interest,  I do not have a problem with advice or guidance being delivered through providers. It could be delivered in the workplace , on the internet , face to face in the pub/home/Starbucks. But I want whatever is delivered to follow these house rules and for these rules (or similar) to be touchstones, referred to in disputes, used in adviser training and most importantly engrained in the DNA of those delivering advice or guidance.

Advice or guidance?

Am I hung up on “advice or guidance”- not really. Where advice (the provision of a definitive course of action) stops and where “guidance” – (the presentation of options) takes over is a legalistic nicety. The “what would you do?” question  is always answered by some caveat along the lines of “but I’m me and you are you”. The spirit of these reforms is that people are able to make their own choices and where they are not , there needs to be an acceptable default position.

Default positions?

I am interested in what a default position might be and this is where I think much of the discussion will focus. To date we have defaulted into annuities but this doesn’t seem a likely default going forward.

If the default is to liberate pension savings into personal bank accounts then I’m concerned, this would trigger a lot of unnecessary tax and beg some questions about what happened to the money once it arrived in an individual’s account.

If the default is that the money stays in the scheme, I am happy that there is continuity between accumulation and decumulation though how an income is drawn  will be the matter of debate. Critically it should be drawn in the interests of the retiree but we have to accept that this may not be tax-optimal, investment optimal or indeed in the best interests of spouses and children.

If the default is to move people into drawdown products (whether flexible or conventional) I will want the management costs of these products commensurate with the services offered. I suspect that few drawdown products offer anything like the value for money I see in the accumulation (saving) phase.

If the default is collective, then we are looking at Collective Decumulation , which everyone who reads my blogs knows to be my favoured solution. But any CDC plan needs too to abide by the principles I’ve outlined. They will need to cater not just for the expected- the regular income calls of bills and activities of daily living, but on the big events, the catastrophies of later life (I referred to them elsewhere as vicissitudes but sadly catastrophy is better.

Catastrophy insurance

What are the catastrophies? The cash calls of kids and grand kids, the big housing repair bills and the elephant in the room, the spectre of needling long-term care as mental and physical faculties decline. The final catastrophy is super-longevity, the inability to die.

Help at hand

We know (thanks to the likes of ILC) how people spend their retirement savings and we can see that people’s behaviours vary. There is currently a lot of debt in retirement which varies from the planned (mortgages) to the opportunistic (Wonga).

We know that many people die as if in poverty though they have money in the bank, many are reluctant to draw on savings or release equity from property or even to spend their monthly benefits.

We know that others play the benefits system like a harp!

Setting out with a few house rules

In planning a new regime for decumulating wealth in later life (which is what George Osborne has initiated), we need to know what we are doing.

We are planning to rebuild a massive edifice on a site where the dust has only just settled. We do not have any time to waste, we need the new edifice in place by April 2015. But by the same standards, we need to build on solid foundations.

I look forward to discussing with all kinds of people how we go about this. We need to hear from the gerontologists like Debora Price (who understand the way old people think and behave), we need to hear from the actuaries and financial engineers who understand the mechanics of consumption, but most of all we need to understand the needs of people retiring today and tomorrow and shape policy around those needs.

In this a few house rules need to be set down now.

This post first appeared in www.pensionplaypen.com



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to A few house rules…

  1. Thanks Henry, especially for your always-cool analysis and the public endorsement. I am working up to a blog but I have tried to resist responding too fast to what I think is a hugely complex situation. Two strands to the problem I think. 1) How do we ensure in a civilised society that people have an adequate income and adequate care throughout their lives; and 2) what is the optimal tax, welfare, personal finance and pension regime to have the best chance of this happening. I (but not everyone) would add, 3) what is the most socially just way of doing all that. I think pretty much we are failing on 1) and 2), and we are certainly failing on 3). I think the proposed reforms are an improvement on what is going on right now, but very far from a golden solution. We need to know what good looks like before we can work out how to get there.
    Allied to this, perhaps quite obviously, is the politics of pension reform. We have had a sharp lesson in that this week – of the Orange Book variety!

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