“Elasticity” – a layman’s way of thinking of the risks in getting a private pension


Elastic is such  strange stuff, but so useful. It allows clothes to stay up when times are hard and the body thin. It allows clothes to expand to fit bodies bloated in times of plenty. Elastic can be discretely sewn into garments or displayed as a feature – like garters and braces.

Pensions can be elastic, able to resume their normal shape spontaneously after being stretched or compressed. They are able to encompass much variety and change; and can be flexible and adaptable. But like elastic – they can break if forced too far (thanks to Mike Harrison for reminding me of Hooke’s Law.

Without elasticity, pensions can also get broken. The years of plenty in the 1990s were marked by ever increasing promises to members. But as the pensions expanded in size, there was no capacity to compress them when the funding began to shrink. Many defined pension schemes found their trousers falling down in the decades that followed. There had to be an emergency intervention with a belt , when trustees found they had no braces. Some schemes had to be belted up and packed off to the PPF.

Without elasticity, pensions can look very unattractive. Buying an annuity today you have to buy a one size fits all garment that fits like a dustbin liner. To insure against all risks, the annuity provider creates a garment that may provide basic covering but is unlikely to provide a lot of fun to wear. The idea of an elastic annuity is as incongruous as a fashionable straitjacket.

Some pensions have the capacity to be elastic, if only to be hopeless in the wearing. The principle of with-profits looks like a highly sophisticated corset that can be adjusted to the needs of the wearer but requires an expert to remember where the ties and stays are. With-profits failed as corsets fail, because they need experts to use them and those who wear them , have little idea of how they work. elasticity so hidden that it might as well not be there.

Some pensions require you to bring your own elastic and to adjust your garment as you go along. These are “DC pensions” which aren’t really pensions at all, only the kit to do your own. A DIY drawdown pension, typically needs frequent visits to the tailor and if these are missed, the pensioner may well find themselves cruelly exposed when they least expect it.

Finally, we have the flexible scheme pensions we know as CDC. These can come in two forms, “an all in one suit” such as Royal Mail is considering, or the “trousers only” variety – considered by many master trusts as a feasible means of paying a pension- elastically.

Clearly there are advantages to both arrangements, the all in one suit is handy and simple and is in practice a CDC scheme which takes care of both the accumulation and spending phase of a retirement plan. The trouser only plan, simply covers the time from when someone stops saving and starts spending their entitlement, as a wage in retirement.

Concluding the elasticity conceit, whole of life CDC plans have built in elastic and unlike with-profits plans, the management of the elasticity is simple and its impact plain for the member to see and feel.

The Royal Mail plan is one purchased by the employer and is pretty much a “uniform”, but the CDC pension which simply acts a pair of trousers allows a much greater variety of tops. Indeed it can be matched with any form of DC saving above the waistline, providing a well fitting pension covering the parts that matter most.

Thanks to my good friend and colleague Philip Persson, for this ingenious extended metaphor.









About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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