FCA- Outcomes for DC savers will improve when we resume sharing risk!


The FCA has asked for response to it’s Retirement Outcome review, NEST have shared their response with the FT which reports  NEST saying that, without “the right support structures in place”, it was “extremely concerned” its 5m members may run out of money in later life, be hit by high charges or overpay tax….that, while the market was still evolving following the 2015 shake-up, there was “no evidence” of its ability to deliver an outcome that would work well for its growing membership of largely low earners.

 “We agree with the FCA’s conclusion that the retirement market does not work for many savers, particularly those on small to average incomes, who don’t tend to seek advice, shop around or feel confident making financial decisions…. We believe our members risk paying more in charges and taxes, missing out on investment growth and most worryingly, either running out of money too soon or underspending their pots without the right support structures in place.”

Gavin Perera-Betts, chief customer officer at NEST.

NEST said it was important for the FCA to explore “possible intervention”, and in particular remedies that protected less engaged consumers with smaller pots.

“While we welcome innovation in the market, there is no evidence that the needs of the mass market — representative of Nest’s membership — will be addressed,”…..“We strongly support the introduction of guided investment paths with minimum standards of governance which meets the needs of our mass market.”

NEST v the rest

I’ve had a recent meeting with Gavin and neither he – nor NEST – appear to have any agenda other than that of the consumer. Charges of conflicts between NEST’s commercial value and the value it offers its savers do not come into it.

I’ve also been at an FCA retirement outcomes workshop where NEST was represented, there I saw a variety of providers with strongly held views, most of which were argued from self-interest.

I say we should listen to NEST above the market, if we are following a consumerist agenda. However, NEST’s insights need to be tested by the often contrary positions adopted by those with alternative agenda.

I have made my own submission to the FCA (late) which I am not publishing here. The last time I pre-published my views, they were disallowed. Presumably this will not happen to NEST – that would be a shame! (I suspect that the FT published NEST’s views after Close of Business on Friday – deadline day).

What people say they want depends on how you ask the question!

We all know that “framing” is critical and that independent research depends on open questions that do not solicit a biased response. This is why  FCA research has greater integrity than provider research.

This is what the FCA have found.

.consumer 2

This is the product architecture at people’s disposal. Over half the pension pots went down the “take the whole pot” route on the extreme right of decumulation.

consumer options

This is where the withdrawn money went

consumer 3

My conclusion is simple; if you ask people they can have “pension freedom”, they will say “yes”. The alternative is “pension bondage/servitude” which is not attractive.

If you ask people do they want an ongoing “wage in retirement”, as the CWU are asking 130,000 postal workers, the likelihood you will also get the answer


This is behavioural science stuff. There is a more difficult question for Government which is “do people act in their own best interest?”. If you are a true free- marketer, your answer is likely to be “yes”, but most people appear to believe in Government intervention. This stops us jumping traffic lights and imposes order on our behaviour so we do not become a menace to others.

This concept of reasonable force applied by Government goes back to John Stuart Mill.


We need to take reasonable force, because as Addison said “inclination will at length come over to reason.

voice of reasonI suspect that both the CWU and the FCA are right. The FCA are right in observing that people when offered freedom – take it – without knowing what to do with it.

However when asked if they need a wage in retirement , people say they do, without doing much about it.

What are we going to do about it?

Frankly we can spend a lot of time dancing on a pin. The FCA require a lot of responses but I am by-passing all the niceties and cutting to the quick.

I am asking the FCA’s question “what are we going to do about the fact that people cannot get a wage in retirement from pension freedoms?”

Here are the FCA’s current conclusions about the market.

consumer 4

An analysis that ignores risk sharing

This is fundamentally flawed analysis resulting from a myopic view of the market. If the FCA was broaden its thinking, it would discover that the vast majority of retirement income in this country comes from risk-sharing

The State Pension is paid from collective taxation and provides a universal solution based on agreed rules, signed off by parliament.

Occupational DB plans, including  the pensions paid out in the public sector depends on what the Pensions Regulator calls integrated risk management, risk sharing between sponsors (employer or the taxpayer), trustees and members.

Even annuities are based on risk sharing with those annuitants who die early subsidising those who live long, with insurance companies taking up the slack through their reserves.

Until recently, with-profits was the primary tool by which people could plan a half-way certain outcome from their retirement savings. This depends on investment risk-sharing, some with profits policies actually pooled longevity risk. It is interesting that with-profits policies are once again finding favour for “decumulation” with the Prudential reviving its fortunes and Aviva following suit.

The remedies that the FCA discussed at the meeting I attended , all assumed that the solution was the empowerment of the individual to take the complex decisions presented to them.

consumer optionsWhile we experts know the options , can we really expect ordinary people to understand these options – unless they have them explained and explored by an adviser?

The idea that a robo-adviser is going to be bold enough to prescribe such complicated solutions as flexi-access drawdown or hybrid solutions depending on blended products is “difficult”!

There have to be easier ways of providing people with a wage in retirement! I stood up in the meeting with the FCA and declared my simple remedy.

It is that the FCA recommend to the current Pensions Minister that he instructs the DWP to recommence drafting of the secondary legislation for the defined ambition pensions envisaged by Steve Webb and legislated for in Pensions Act 2015.

The FCA may have noticed that the “innovation” in the market has been slim because those planning to offer collective decumulation products using risk-sharing , have been denied that right by the cancellation of the legislative drafting by Ros Altmann, soon after she arrived in office.

Would NEST agree with me?

I don’t want to put words into Gavin Perera-Betts mouth, but I suspect that the conclusions NEST is coming to privately is that the guided investment paths which NEST sees as providing the infrastructure for decision making for their customers need to include a simple option called “a wage in retirement”.

To me that requires some entity to contract to pay pensions to people in return for their retirement savings. That entity could be NEST or it could be a specialist decumulation scheme into which money was paid or it could even be an insurance company offering risk pooling as insurance companies used to do. The Pension Insurance Corporation do just this, so do other specialist buy-out insurers.

But their is currently no bridge between the world of the institutional buy-out insurers and the retail retirement income specialists.

NEST could build such a bridge and be the sponsor of innovation, they could work with specialists in risk pooling to provide a scheme pension option into which their customers could default.

But NEST cannot do this without Government help, it would need the capacity to offer pensions without guarantees based purely on its best endeavours and the co-operation of its membership who were prepared to share the risk.

Not just NEST, but any number of scaled master trusts could do that and the insurers could do it either through their master trusts or through with-profit annuity structures (albeit with greater transparency and with limited property rights).

Why are these “remedies” not on the FCA’s list?

I discovered why at the FCA workshop I attended. When my group was asked for innovation and I proposed the solution outlined above I was put in my place very firmly by the FCA representative who told me I was exceeding the scope of the Retirement Outcomes Review!

It is perfectly obvious to me, after attending the meeting, that the review is simply not considering risk-sharing as a potential solution. This seems to me more out of prejudice against risk-sharing than out of any logic. My mind returns to Addison.

We cannot force the pace on this, only point out that the end-game in this argument will see reason prevail – it always does -given time!

voice of reason

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to FCA- Outcomes for DC savers will improve when we resume sharing risk!

  1. John Mather says:

    Many of those who are wage poor in retirement never solved the problem of an adequate wage prior to that. Saving for post work wage is therefore not on their agenda.

  2. Con Keating says:

    Excellent blog Henry. I think you should look at a Canadian scheme – CAATs, and also at some survey work done in Canada on what individuals really want, and are prepared to pay for – http://www.cpplc.ca – There is also a study of DB versus DC on that site – albeit in a specific context – it confirms and reinforces the findings of Kevin Wesbroom, the PPI and many more.
    We seem to be in entirely the wrong place.

  3. Phil Castle says:

    Excellent article Henry. Why are the FCA and Govt not listening?

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