“We are as concerned as we can afford to be”

ambition

The DWP has now presented the draft bill that will enable Defined Ambition pensions to be set up, probably from this time in 2016.  While lawyers pour over the clauses, it’s worth considering the responses the Government received to the ideas it floated in “Reinvigorating workplace pensions”.

The Government’s response can be found here

The stated aim is to “let a thousand flowers bloom” in the pensions garden but privately the DWP except that many of these flowers are weeds and that market gardeners will quickly concentrate on cultivating the flowers that sell.

The paper is supported by some market research commissioned by the DWP which is published separately here. It is worth a look if only for the comment of one employer

We are as concerned as we can afford to be.

The reaction of those who I have spoken to is that all this is an irrelevance. Employers will not be concerned enough to take a step closer to DB.

Consultants are quick to raise concerns

Earlier this week, Nico Aspinall of Towers Watson told an NAPF DC connections audience that his firm considered the political risk of a future Government crystallising the promises of target pensions into guaranteed benefits, a serious threat to their development

I was told by one large consultancy yesterday that they will not be working on CDC as there is nothing in its development that has any commercial interest to it.

In short, ambition is in short supply and a passion for collective solutions pretty muted!

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These Consultants are tilting at windmills!

Our consultancy, First Actuarial disagrees with this obsession with failure; we think that many of the giant threats on the horizon are no more hostile than the windmills that Don Quixote tilts at!

We are enthusiastic supporters of collective pensions as anyone who reads this blog knows. Commercially we see ignoring the opportunities of collectivism as at best short-sighted and at worst “beggar my neighbour”.

This is based on these simple observations

  1. There is nothing in the market for people retiring with DC pots other than advised drawdown, annuities or non-pension related investments
  2. The British public are still wanting income in retirement, they just don’t want annuities
  3. Ordinary people want managed solutions which don’t involve them in making investment choices or decisions about self-insuring (against living too long or long-term sickness)

For a very large proportion of our population, defined benefits – principally the Basic State Pension but also (for those working in the public sector and a few private companies) workplace DB schemes, will be their principal source of DB income.

The paper makes no attempt to deal with the problems of DB, these have been put in the “too hard” box though the door is left open to future Governments to do a “New Brunswick” and take on immediate risk transfers from those paying for public pensions (the private sector) and those benefiting from them (the public sector).

The paper explores the four models that have been put forward for DC plus. Frankly this is civil servant doodling, none of them have much practical application for workplace pensions and I’ll leave them to wither on the vine (they aren’t coming to market).

 

The meat and two veg

The paper’s meat is in the CDC section where there is a new definition emerging of “collective benefits”

Obsessed as we are by pension saving, we forget that we are approaching a point where DC will be a major capital reservoir for pension spending. We can spend individually (buy an annuity, set up a drawdown plan or pay the tax and put our pension pot in our bank account.

Or we will be able to enter into a collective benefit scheme which will pay pensions from a big pot managed on “big pot” lines. There are many examples of pensions being paid from big pots – all of them are called defined benefit.

Paying pensions from a big pot and not guaranteeing the pension is what is new.

Looked at it this way, it’s hard to know what all the fuss from consultants is about. It really is nothing to do with employers whether people choose to have their pension paid from a big pot without guarantees or to set up an individual arrangement. The employer need no more than signpost the opportunities and let guidance do its work.

If we were to view CDC at this point as an option for people to get paid an income from a big pot at a rate of consumption advised by professionals with a decent degree of certainty, we have the essence of the Government’s ambition.

For me – that is enough!

Employers may want to get involved but they don’t have to. Providers will be keen enough to get involved- there is some skin in the game for them. There will be many people who will want to be involved in the management of these schemes- pension trustees abound.

Most importantly, I reckon that around the same number of people who want to take no investment decisions in the build up of their pension pot, will want no part in the spending of their pension pot.

If about 80% of the accumulated pots we are building up from private pension saving, through auto-enrolment and through the DC plans that pre-dated auto-enrolment and already cover millions, are spent collectively, then those who are currently poo-pooing CDC, may join First Actuarial.

We think there is a high certainty that we are right and if you read the consultation response  you will see First Actuarial’s support for CDC displayed.

We wish the DWP success as this bill makes its way forward and look forward to the development of a third “collective” way of providing for the demands of later life.

 

Yesterday was another step on the way to Defined Ambition pensions, I hope to be there at the end of the journey but know that we are still only a few miles down the road.

We stood here in 2009 with auto-enrolment.

 

This post first appeared in www.pensionplaypen.com/top-thinking

 

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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