The reason we have NEST and its £400m debt to the tax-payer is that the private sector refused to commit to supporting auto-enrolment ten years ago. If the organisations like Legal & General, Standard Life and Aviva , could have had the vision, they – plus the new players – Now , People’s Pension and the young pretenders could have provided the capacity the market needed and we would not have had to have the palaver of state intervention.
I disagree with Mick Mcateer and Nigel Stanley, I would much rather have had that £400m spent on welfare and what the DWP is really supposed to be doing, providing a safety net for those most vulnerable in society.
We are now faced with the possibility of NEST II and the financial services industry is faced with the same issue.
Just as in 2005, it was faced with underwriting the auto-enrolment system (which it refused to do- so it is being asked to come up with a reliable default mechanism by which people can organise their post-retirement finances.
Just as in 2005, it is standing to one side and showing a failure of nerve.
Our former pension minister, Steve Webb, put this very bluntly at a conference yesterday. (thanks to Michelle Abrego and Citywire for this)
A default decumulation strategy should ‘not be ruled out’ if providers fail to create good at-retirement alternatives in response to the pension reforms and consumer demand, said former pensions minister Steve Webb.
Speaking at the Lansons future of financial services conference, Webb said that it was a bit premature to consider how new retirement products would shape up, but he would not rule out a government-backed body, such as National Employment Savings Trust (Nest), having a role in default decumulation options.
In March, consumer group Which? called for a government-backed ‘backstop’ drawdown provider, in the same way that the government created the Nest for auto-enrolment into workplace pensions.
He said: ‘I wouldn’t rule out Nest having a role in decumulation. I think it could be part of the mix. If the at-retirement market can’t be made to work and innovate new products a public service alternative should be looked at. At this stage let’s try and get the industry to come up with the products that consumers want.’
Webb also clashed with Financial Inclusion Centre founder Mick McAteer after McAteer made comments about new retirement solutions being unable to meet the goal of retirement, which is to maximise income.
Webb said: ‘The goal in retirement policy is to provide a decent income in retirement. No it isn’t. I used to think that. It is quality of life in retirement. That is a mixture of income and wealth. You choose, would you rather have everything as income, that’s still an option, or would rather spend some of it when you’re younger and fitter and want to travel or pay off that debt?’
It’s very simple. The Pensions Industry (including the ABI, IA and NAPF) can either get together and agree a collective approach to decumulating our retirement savings, or NEST II will do it for them.
It doesn’t matter if you call collective decumulation CDC or target pensions or collective drawdown with longevity protection or something totally off the wall, it amounts to the same thing.
What is needed is a means for people to invest in a product that pays them income when they want it and cash when they want it and does so in a way that doesn’t leave people with no money if they live longer than they expect.
People who read this blog, will know that this is no more or less than we have been asking for the past 5+ years. Anyone who knows advised drawdown, knows that it is not a product suitable for sums under £100,000. Anyone who knows annuities, knows that our rates are shot (20% lower than the American equivalent) because the cost of our guarantees prevents them being higher
If you want 50% higher annuity rates, you can get them right now by buying extra state pension. The state can pay better pensions because it doesn’t have to jump through EIOPA hoops , invest in funds and the state already has the #1 pension payment system in town.
If you want brilliant value from the market, defer your state pension and get an uplift of 10.4% for each year of deferral.
But these little arbitrages against the national insurance fund, are no more than short-term sweeteners. The National Insurance Fund is, as Michael Johnson keeps telling us, bust. We cannot rely on state hand outs to resolve the crisis.
So we have two choices. Either the financial services industry can get its act together and find a way to manage the drawdown of the squeezed middle, or Government will do it through NEST II
We have been warned
Let’s not get caught with our trousers down again.