A state of funk! Occupational DC and the pension freedoms.

state of funk

The Pensions Regulator has published an excellent paper outlining the current position of occupational pension schemes towards providing their members with pension freedoms. You can read it here and for its clear language, well developed argument and comprehensive understanding of the dynamics at work, I suggest you do. If you are not up to speed with all the technicalities, there is a handy glossary which I suggest you read first, otherwise you will find this table a bit of a turn off!

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I do this job for a living and have, at various stages of the last year, known what all these abbreviations mean, but I was grateful for the explanation that follows

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But you don’t have to be a statistician to work out that apart from one large occupational scheme (almost certainly Rene Poisson’s JP Morgan DC plan), nobody’s much interested in offering pension freedoms as in-house scheme service. Which we knew anyway-but now know officially.

The real value of the document is not in the survey, but is in the reasons (excuses?) given to the Regulator for not embracing this opportunity. Indeed, the word “opportunity” does not spring from the page. Instead the key words is “risk”.

The four key risks identified are

  1. Admin – DC pension schemes aren’t geared to pay pensions, let along to act as surrogate bank accounts
  2. Communications –  DC pension schemes do not see themselves as financial advisors
  3. Investments – DC pension schemes don’t want to be liable for drawdown strategies that fail
  4. Governance and regulatory risks – DC pension schemes don’t feel competent with all this (and don’t much feel like learning)

You cannot blame DC trustees. They never signed up for any of this stuff and by and large they’d be much happier with the guaranteed benefits in payment from DB schemes, where there is precious little challenge “in decumulation”.

The Government (aka the Treasury), may be frustrated with occupational schemes but they might as well get frustrated with the insurers running workplace pensions and their IGCs who aren’t that much further down the line.

The prospect of a pension bank account is still a chimera for all but a few members of occupational schemes, even if they can transfer their benefits into a “state of the art”drawdown plan. It is the other side of the mountains as an in-house option.

The state of funk

There is a general state of funk about pension freedoms in the financial services industry and nowhere is it better expressed than here.

“There is a fear of things going wrong and claims being made against the ceding scheme, which puts the risk back on the members.”

The enterprise culture of Fintech, Robo-advice and of the aims of the Financial Advice Market Review is nowhere to be seen. Instead the dead hand of a risk based regulatory regime and of a sector that has completely lost touch with  what it was originally set up to do – is everywhere apparent.

People no longer want pensions, they want a happy and solvent retirement where money is not an issue. If pensions turn out to be part of this, so much the better. We have to explore these freedoms at some point – the technology is available and needs to be applied, now however, does not appear to be the time.

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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2 Responses to A state of funk! Occupational DC and the pension freedoms.

  1. bobchampion says:

    Henry,
    As Paul Simon says “there are 50 ways to leave your lover”.
    The glossary lists the 7 payment types. How an individual leaves their pension scheme now depends upon a combination of factors
    • the many different ways individuals move into retirement;
    • the varying ages at which they do so;
    • the increasing number of flexible retirement income products and how products can be combined;
    • what other pensions and other accessible wealth they have;
    • their benefit and tax position; and
    • no means least, what their personal objectives are.
    Combined there are probably well in excess of 50 ways to leave your pension scheme.
    Compare two male members who have more than average DC pension savings. Both have £80,000 and no other benefits. One has a wife who has built up state and other benefits of her own, the other has a wife who has no pension benefits and made an election for reduced rate National Insurance contributions which has never been revoked.
    The household income of the latter, if he annuitised, means he could probably claim Pension Guarantee Credit. To benefit most from his pension savings he needs to consider how before retirement how to get the £80,000 out of the scheme in a tax efficient way ending up with £10,000 in a savings account. If he does not, he will end up suffering 100% “tax” as his Pension Guarantee Credit claim will be reduced by his pension income.
    He will be better off making sure all the house repairs that have been put off “until retirement” are undertaken before he retires and that he goes into retirement with a reliable car, than if he waited until after retirement to sort those things out.
    OK an extreme situation, which will become less common over the coming years, but it illustrates that the size of the pension pot does not dictate the solution.
    DC pensions are in my parlance Retirement Income Savings Schemes – that is where funds accumulate to provide part or all of your retirement income. It is the schemes role to help members understand the choices that are available to them and to facilitate the flexible access they need. This does not mean providing all means of access and acting as a Bank Account, someone else can probably do that better if that is what is required as it maybe by the Member above.

  2. henry tapper says:

    That would be a great blog Bob! probably better than mine! Thanks for the comment

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