LTA exposes the DC horror-show.

dc horror show

Because I am on holiday, I am reading the Sunday Papers. Someone has bought the Sunday Times which I haven’t read for at least 2 billion years. I’m left with the business pages and two articles by Ian Cowie about how “suddenly pensions are tumbling down”.

This is the story of how George Osborne has made it impossible for hard saving folks (like me) to save enough to buy an annuity of £27,000 or a defined benefit pension of £50,000.

I agree that capping people’s ambition at £27k pa is pretty mean but of course this assumes you buy a proper escalating annuity with some protection for your loved ones.

I also agree that it is absurd that while the £1m Life Time Allowance only buys a proper annuity of £27k, it buys a comparable DB pension of £50k pa.

I even agree that it is absurd that MPs get wonderful DB pensions while most of the rest of us are landed with rubbish DC.

But that’s when a few bells should start ringing in the orderly mind.

Why should £1m buy so much lower a DC pension?

Well – you could argue that an annuity is guaranteed for 100% of its payments while only the first £32k pa or the DB pension has the protection of the Pension Protection Fund. But as the guarantor of the PPF is ultimately the taxpayer as is the guarantor of the MPs and most remaining open DB plans, this point is academic.

Ever since the Government Actuary published his tables that estimated the cost of a pound’s worth of DB pension costs £20 while a pound’s worth of DC pension costs £30, I’ve been trying to find out why.

There are a whole lot of reasons, which include the fact that DC pensions are subject to EU Solvency rules while DB plans aren’t. They include the margin that has to be paid to the shareholders of the annuity insurer. They include too the efficiencies that are created by individual policies rather than he collective structure and payment systems of a DB plan.


So while I’m very angry that the Chancellor is again punishing the hard working regular saver (rather than the opportunistic tax-dodger), the real scandal lies in the difference in the conversion rates between DB and DC.

Why isn’t Ian Cowie asking the more fundamental question as to why George Osborne can get a pounds worth of protected pension for £20, when the likes of him (and me) have to pay 50% more for the same thing?

The answer is why most people need DC pensions being paid as DB pensions as they would be under CDC. The answer is not to restrict the amount DC savers can save but to ensure that DC savers can have the same deal as those dished out DB benefits.

When I went to hear Andrew Neal talk about the budget, he made Ian Cowie’s point that he would not be saving further into pensions because of the risks that any future Government would make another retrospective tax-raid on our retirement security.

Andrew Neal also mentioned the unjust treatment of DC savers, relative to DB savers but those GAD numbers are not  there to annoy Ian Cowie, they are there to highlight how horrible the fate of the DC saver is.

If Ian Cowie, Andrew Neal and George Osborne really want to get the tax treatment of pensions right, they would promote the DB way of doing things and accelerate the sift from DC decumulation to CDC decumulation.

But that might involve a little bit more engagement in the fundamentals of funded pensions , than we are getting today.

About henry tapper

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