One of the pleasures of living in the City of London is the early evening beer with City slickers.
City slicker Gregg McClymont and I had a pint or two in the Fine Line last night and caught up after his swanky Italian holiday.
Before I blow Gregg’s socialist credentials entirely, I’d point out our conversation was about the universal minimum wage, a fairer state pension, a tax on the imputed rental on residential property and how we can reduce corporate debt in favour of equity.
But then the conversation detoriated into pensions. Gregg referred me to a recent column of his in Money Marketing, which I had not read. I’ve read it now and will read this column again- Gregg is a good commentator.
Like this article, you have to read through some treacle to get to the main event. He’s talking about the recent “Retirement Income” study from the FCA and remarks
In the footnotes of its paper, the FCA cites conversations with regulators in Australia, the US, New Zealand, Denmark and Ireland.
But only Australia is mentioned in the body of work, with positive noises made about the proposal that pension schemes (known as “supers”) default members at retirement into hybrid products which combine income drawdown and deferred annuities.
Gregg goes on to point out that though the Australians are trying to impose pensions on those with Super Accounts (everybody), there is yet no evidence of success.
Obama similarly tried to impose annuities on 401k accounts but this, like his Fiduciary rule, has been knocked on the head.
Only in Denmark, where the deferred annuity has never gone away, is there systematic “pensioning” of retirement savings.
Gregg, who has considerable empathy, spotted the struggle within the paper to fit a round peg in a square hole. Much as the FCA want to point to international experience to demonstrate that pension freedoms will lead to a lasting settlement of the retirement income crisis, they can find little or no solid evidence.
Perhaps this is why the fruits of the FCA’s discussions with these national regulators go undiscussed. There are simply no lessons to be learned from the US, New Zealand and Ireland learned regarding good decumulation practice
Gregg and his wingman Andy Tarrant, have been publishing international synopsis for some time. They conclude that it is only where there is massive state intervention (as in Switzerland where the state subsidises annuity rate) do DC pots morph into pensions.
Gregg concludes that the public dislikes pension – but distinguishes dislike from distrust.
I dislike the gym , but trust working out to restore me to my former slim self.
I dislike going to Church, but go because I feel spiritually cleansed for doing so.
Deferring income rather than spending capital – is only another example.
I could go on, most of the things that are good for us , involve not doing something that is immediately more pleasurable.
If we can learn one big lesson from auto-enrolment is that the public need some form of incentivisation to save in an orderly fashion. In the case of AE it has been the organisation of that saving around employers who have created the savings apparatus (and partially sponsored our savings – albeit at the expense of wage increases). We have accepted this tough love – 9 out of 10 of us have not spat out the dummy.
I suspect that precisely the same would apply to the imposition of a default pension mechanism. There are two features of such a mechanism that appear to me critical
- the right to opt out (and exert property rights)
- the removal of the guarantees that throttle the conversion rate from cash to pension
As regards property rights, the Government know very well that the irreversible decision taken by those purchasing an annuity is too hard for most people to make (unless they have no choice). That is why Osborne was applauded by all sides for stating that no one would (post freedoms) ever have to purchase an annuity again. It is why the Government tried to create a secondary annuity market, so that those who had purchased an annuity could reassert their property rights and cash out.
The first lesson is that any pension system imposed by of a default would needs have an escape button allowing people to have a Cash Equivalent Transfer Value – on request and the right to take it.
As regards guarantees, we need to really nail the cost of a guarantee and to explain to ordinary people that they don’t come cheap. If people were offered a scheme pension without guarantees and an annuity with guarantees, the first question they would ask is why the scheme pension is so much higher – the answer could be – because it has no guarantee.
People could then be able to look into just how much risk they were taking on with an unguaranteed pension paid from one great big pension pot (I am of course talking of a collective pot). They could then make an informed choice based on their tolerance for future uncertainty.
In practice, just as 90% of people chose with profit endowments over non profit endowments, so 90% of people would default into a non-guaranteed scheme pension rather than buy an annuity or go it alone with a SIPP drawdown.
The second lesson is that the only acceptable alternative to a guaranteed annuity, SIPP style drawdown or cash-out is what we used to call as scheme pension paid at a rate determined by actuaries without the certainty of a guarantee.
For the one international comparator that the FCA ignored was Britain, which for a great deal of the time since the war , has operated such scheme pensions, un-guaranteed but paid with the best endeavours of trustees. Often these pensions have been paid with minimal sponsorship from employers.
Before I am hit with the John Ralfe mallet, let me point out that the reason these schemes are now generally in deficit is because of accounting standards measuring valuations, on a best estimate basis, these schemes are still solvent and – left to pay out the pensions without interference, the vast majority of pension schemes would meet their obligations.
This final paragraph may so enrage John that this may be my last blog, but I firmly believe it to be true!
The FCA – as they explore retirement income, should look at how defined benefit schemes developed in Britain between 1950 and the turn of the last century and ask itself if it might have something to learn from the collective experience. Then they should look at the other great success story, auto-enrolment and ask whether that too might teach us something about auto-enrolment.
Gregg McClymont’s fine article hints at the solutions and I – with my size 12 hobnails- am merely drawing the conclusions that I am sure he has come to himself!
Britain needs a default decumulator, it needs to give scheme pensions with property rights and it needs to make it quite clear that we cannot expect absolute certainty of income from private sector pensions.