No meat in the pie! Investment pathways

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So what do we think?

Yesterday’s pension play pen lunch brought together a small but enthusiastic group of us to discuss whether the FCA’s planned in retirement investment pathways, would bridge the advice gap identified by FAMR and the Retirement Outcomes Review.

If that sounds pretty technical, then it wasn’t, having over ordered pies and fish and chips this was a chance for bellies to be filled and conviviality overflowed. Thank goodness there is still a place in the City where we can discuss serious issues in a relaxed and harmonious way! These lunches happen the first business Monday of the month, May was odd in that the lunch fell on the 13th. Lunches are advertised on social media and they always happen in the partners room at the back of the Counting House pub in Cornhill.

Pension playpen logo

No meat in this pie

John Quinlivan referred us to a paper delivered by Willis Towers Watson in November last year. You can download the paper from this link, but to give you a flavour, here is how it starts

Something is missing from the defined contribution (DC) system.

If DC is meant to be a retirement system, then it should provide income that supports participants throughout retirement. However, retirement systems do not come into existence fully formed; they begin with fairly simple design features and evolve over time.

In its earliest days, the DC system was a savings (or accumulation) system, primarily a supplement to the defined benefit system. Managing the payout phase was not a priority. Several decades on, the system has matured. The absence of this feature cannot be overlooked any longer.

And this is how the paper ends

the DC system of today has work to do.

The bit in the middle explores various options for “managing the payout phase” without landing on any one as a way forward. The working group that produced the paper was formed by Roger Urwin who I remember grappling with the problem of turning individual pots into what we used to call “scheme pensions”.

The paper comes to the same conclusion – that only through pooling can this be done. Oddly the paper does not discuss pooling longevity risk in the way collective DC does it. Instead it discusses three ways to help individuals take the complex decisions needed to turn a pension pot into a wage in retirement

In summary, demand for lifetime income solutions has been anaemic in the past. It could be strengthened through a more explicit focus on longevity tail insurance, through thoughtful choice architecture, and through the application of new technologies.

The meat in today’s pie is a little gristly for me. Long-tail insurance is only happening in annuities, choice architecture can be delivered by new technology but in a world where the employer no-longer wants to play a part, there is a missing link, WTW don’t do retail.

Is there need for a non-advised solution ?

WTW do have a product that they have built that could deliver much of what is missing in DC (and annuities could do the rest). I am not sure however whether LifeSight – WTW’s mastertrust, has a retail offering. If it has – it has kept it pretty quiet.

The fact is that most master trusts have been built around the needs of employers to stage auto-enrolment or to consolidate failing legacy DC plans on a B2B basis. WTW’s solution is no different, even if it has the capacity to offer disconnected individuals a way to get their money back.

The insurer’s have similarly isolated their workplace pension offerings and do not advertise the capacity of workplace pensions to spend your savings. The assumption is that if you have a pot worth spending, you’ll have a financial adviser guiding you into a SIPP drawdown program.

But most of the “claims” from workplace pensions are far too small for advisers to worry about, advisers will only get involved if the workplace pension can be subsumed into the adviser’s vertically integrated solution. For WTW’s Lifesight (sitting on an LGIM fund platform, read a wealth management solution sitting on Transact). Both solutions are placing advisers at the heart of the solution

If you are running successful businesses, the problems of those who don’t have access to Lifesight or the specialist skills of wealth managers, there remains a gap – an advice gap. There is a need for a non-advised solution which is what the FCA want to encourage with the yet to be fully revealed in retirement “investment pathways”.

The risk of Implied outcomes

I was left scratching my head as to why a non-advised solution to the retirement outcomes review isn’t emerging.

Short of Royal Mail’s CDC proposal, the thinking around choice architecture, technology and long-tail insurance is pretty much the same as what it was in Roger Urwin’s heyday 20 years ago.

The new fund platforms have given life to the wealth management industry and allowed consultants such as WTW to provide solutions for the workplace. But we have yet to see the emergence of a genuinely mass-market pot aggregator capable of giving us our money back in an orderly way.

I suspect that this is down to fear, fear of the implied outcome of offering people “pensions” and of people not quite getting what they thought they were going to get.

The implied outcome of a pension plan is – to most people- an income that lasts as long as you do.

Whatever solution the FCA finally end up with, it won’t be collective as a CDC is collective. It will have to rely on annuitisation and individuals pressing buttons well into their senior years,

If the outcomes of their pensions aren’t what they implied at outset, elderly people (and their families) are going to be disappointed and will point the finger of blame at someone.

This is the risk of an investment pathway that implies it is sorting out the pension problem. It is only addressing one aspect – the choice architecture. It is not dealing with the issues of people living longer and it certainly doesn’t address people’s natural assumption that their workplace pension provides a wage for life.

In a recent survey of its membership, NEST found that an alarmingly high proportion of its members believed that because NEST is the Government pension it would provide them with a Government or State Pension.

There was meat in the Pension PlayPen pies but there was no meat in the debate, because despite our talking for nearly 90 minutes we were still no nearer answering the question we had posed ourselves.

“Will investment pathways bridge the advice gap in retirement?”. I leave it to Anthony Morrow – who couldn’t get the meeting to sum up the mood of the meeting as we broke.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to No meat in the pie! Investment pathways

  1. Brian G says:

    Apart from annuitisation there is no solution to longevity. The problem is that in a very low interest environment people cannot overcome the possibly incorrect assumption that they have to live longer than they anticipate living in order to get value from purchasing an annuity with their pot. When someone has a spouse the cost of purchasing a joint life annuity reduces their own annuity income even more to the point where many people decide to maybe mistakenly believe that investment risk with drawdown is their only chance to get their money back. It does not matter to the average non advised person that this is a perception rather than a reality because their perception is not influenceable if there is no one there to advise them. The reason that no-one has come up with a suitable drawdown pathway is that THERE IS NO SOLUTION. If there was a solution then DB schemes would be using it themselves. There is no combination of asset classes that works because noone has a TARDIS. It is intellectually fascinating to debate pathways but there is NO INVESTMENT SOLUTION.

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