Occasionally I should allow this blog to publish a vision of what pensions should be, rather than what they are – at least to justify it’s title! Here is my garden of pension delights , a place filled with the intoxicating air of perfect liberty
I will not talk of that demi- paradise that preceded where we are today, it is depicted in the left panel, I imagine that the right hand panel is governed by financial economists.
The five delights of my pension garden
- the freedom to choose or not to choose
- a CDC retirement default complimenting freedoms (but not replacing them)
- the option for employers to use CDC for auto-enrolment
- the option for employers to employ a clearing house for auto-enrolment
- a dashboard that makes sense of retirement options.
The freedom to choose or not to choose
Currently we have no choice but to choose, in short – no default way to spend our pension savings. This is not the case where our pension comes to us as a wage for life (the state pension and DB), but is the case with our DC saving.
A CDC retirement default
I would like to see a default introduced, once CDC has been properly understood and proved both in concept and practice – where a workplace pension nominated a post retirement strategy which required nothing from the member but to sit back and get the money.
Any other option – drawdown, annuity or cash-out, would demand a decision, the “wage for life” solution – using CDC principles would become the default for the millions of us who do not want to make a choice.
The option for employers to use CDC for auto-enrolment
A CDC scheme – in which an employer voluntarily chooses to participate, will have a target pension. The formula for that target might be n/80th of a percentage of notional salary but it is predicated on a money in/money out formulation. The outcome will be influenced by achieved investment returns , by changes in mortality, by all the variables of long-term pension accrual, but it is likely to be considerably more certain than the DIY individual system we use at the moment. It is also likely to be a lot more efficient as it disintermediates through the simplicity of its approach and through the economy of doing the same thing once for many thousands of people.
I would like all employers, whether on their own like Royal Mail, or in multi-employer CDC schemes to be able to switch to CDC. I don’t expect CDC schemes operating at auto-enrolment minima any time soon. The target pension for most people at current rates would look so small as to dispirit. I expect to see CDC as an employee benefit for employers who treat pensions seriously.
The option for employers to choose a clearing house for auto-enrolment
Right now, the law requires each employer to choose an authorised workplace pension for auto-enrolment. Employers can nominate more than one pension but few choose to do so, even when there is good reason (for instance net pay plans with no relief at source option).
My vision is that employers that choose to pay for the facility, could offer pension clearing to their staff using the technology we are increasingly calling “open pensions”. There are already organisations such as pensionsync that act as a hub for a number of providers. This “hub and spoke” principle could be extended over time so that all authorised workplace pensions might link to the hub using the common data standards and interfaces developed as we develop the pension dashboards.
A dashboard that makes sense of pension options
Increasingly, as they move towards retirement, people value their income from their work. This isn’t surprising, income is more vulnerable as you become less energetic. We crave a replacement income from the state, from work and from our private savings. This is why pensions matter.
Right now , dashboards are seen by Government and providers as a way of encouraging more saving, but by consumers as a way to see how much they can spend in retirement.
“Outcomes” – are almost always defined in terms of capital and it’s thought necessary to employ a financial adviser to convert capital into income. This clearly makes sense if all an individual has as choices require them to manage the nastiest hardest problem in finances. Since the old “wage for life” solution , is no longer a default (I mean annuities), the pension dashboard could become the means of comparing the risks and reward of drawdown, annuity, cash-out and CDC.
In my vision, the wage for life solution is the new default (or rather a reversion to scheme pensions as managed before mandatory indexation and the various funding regimes introduced over the past thirty years). For those who want to look beyond the default – to annuities, drawdown or cash-out, there needs to be a way to test the suitability of each. I would call this a test-drive. The dashboard could be used as a pension simulator allowing people to test-drive each option.
A garden of pension delights
There are two things that need to happen for my garden of pension delights to take seed
- We need to adopt the new technologies on which these solutions are based
- We need to have the cahoonas to innovate and adopt change
I don’t know what the timescale for the delivery of my vision is, but it’s been in gestation for the nearly ten years I’ve been running this blog!
As I’ve been typing this article, the sun has risen over the horizon as I look out towards the Isle of Wight. A small fishing boat has made its way across my line of sight and is caught in that moment when it crosses the pathway made by the sun on sea.
This picture seems this morning a symbol of what might be, the hope of a better system which illuminates afresh what we have always wanted , but failed to achieve.