What do George Osborne and Donald Trump have in common? DISRUPTION – that’s what. Disruption happens when a system has fallen into a state where it is no longer functioning for the people it serves. It would seem that the United States political system and the UK pension savings system both feel into that category, which is why we had populism, Trump and Pension Freedoms.
The chart above shows that we no longer have a pension system (at least for our pension savings). Instead we have a free for all with most pension pots being fully withdrawn and the use of regular income vehicles (annuities and UFPLS) being confined to around 15% of pots being accessed. What the FCA numbers illustrated above don’t tell you, is the percentage of pots left unspent, benefiting no-one but the pension providers who continue to enjoy back end loaded fees. This is what happens after disruption, it is a systemic mess (a lot like American politics ).
And after the disruption , it is hoped that America will bind together under Biden. I don’t know how capable that man is of uniting the nation but my guess is that he will hold things together without producing a fix, we will have to wait for the next great American president to build back trust and confidence in the Mid West.
For pensions, we have the same problem. We are in the post-disruption hinterland of doubt , where the arguments swirl without any certainty emerging about the way forward.
@hellomcqueen On yr point about annuity sales, just under half of 69,519 annuities sold were for pot values <£30,000, and likely v poor value. Only 12,000 sold for pot sizes of >£100K, or enough for a decent income. Most sales Single Life. Annuity mkt still failing savers.
— Josephine Cumbo (@JosephineCumbo) November 10, 2020
Much as I like and enjoy Alistair’s arguments, they are based on a conservatism that is actually not helpful. The conservatism seeks to maintain a system where insurance companies are the big winners. Insurers win where savers take no decisions because money stays in pots that attract high legacy charges but require little or no maintenance. The bulk of the profit from insured pension books comes from savers doing nothing. Conservatism wins.
Decisions on pensions are rare, few people make them on their own
When savers take decisions to purchase annuities or drawdown, it is usually as a continuation option with insurers picking up the lion’s share of the placement of future business. Take up of open-market options is still low and , other than amongst the wealthy, most people are not taking advice.
Alistair McQueen talks about a “minority of a minority” accessing pots using drawdown, but fails to point out that the “majority of the majority” are simply rolling up their pension savings because they don’t know what to do.
Many argue that to change things, we need to get people engaged through meetings with “arms length -Government funded agencies” operating under the Pension Wise umbrella. The folk arguing for this are also arguing for mid-life MOTs and other forms of financial education which apparently improve our financial well-being. The evidence I have seen that these nudges towards better decision making make much difference, is pretty skimpy.
The insidious impact of inertia
It is quite obvious that most people neither have the will or the capability to organize their own pensions and are much happier having them organized for them by the State, their employers or – if they can afford them – by financial advisers. But this leaves this huge rump of money in DC which is not getting spent but simply rolling up. Much of this money is so detached from its owners that it is labelled “abandoned” or “orphaned”. It seems extraordinary that the marketing databases of Britain’s supermarkets know more about our financial affairs than we do, but when it comes to spending our money, we are so in the dark, we don’t even know what we have to spend.
The longer the pension dashboard saga goes on, the longer that great rump of unspent savings sits with incumbent providers (mainly the insurers) and the less productive use, is made of it. This is what is overlooked by those who are trying to protect us from harm, harm is baked in to the current system. As Sam Seaton of MoneyHub insists, we are protecting people from the wrong risks.
The risk of inertia is that money stays where it shouldn’t be, it doesn’t get spent but lines the coffers of insurers and asset managers who get big fees for doing nothing.
Pensions in chaos need to unite
Our pension pots are ours to spend or maintain as we like. No one wants to take away options for those who want to use them. But most people suffer not from taking the wrong decisions, but from taking no decisions – ending up in bad places through inertia.
For me, a perpetuation of the current system will benefit incumbent pension providers and their asset managers and other sub-contractors. Most people will not get a wage in retirement from their savings but a great pile of money that gives them little but worry.
A simple , universal solution is needed that can win support from all sides because it converts this great reservoir of capital into a wage for life , for the people who own shares in it. This solution is emerging. It is showing its first manifestation at the Royal Mail whose DC and hybrid schemes will convert into one CDC scheme as soon as regulations will allow. The 140,000 odd postal workers who will then get a CDC works pension will be able to supplement their CDC rights with money from other DC savings pots.
When this proves a popular option, other pension schemes will follow, especially multi-employer workplace pensions which currently offer little to members at retirement. CDC has the power to become over the next five decades, the predominate means by which people get paid their pension savings back.
If you have taken the trouble to follow my argument through, then I hope the extended analogy is working out. I see CDC as pension’s JFK – a means of uniting pensions and leading it out of the chaos that the chart at the top of this blog displays.
CDC needs a standard-bearer and Royal Mail has chosen to take on that role. Let us be thankful that they have and hope that we will find a pension JFK that can reunite pension saving to a common purpose.