Ros Altmann

Gareth Morgan

This is a lazy-man’s way of writing a blog, but the comments I have received over the last week have been so interesting, I’d rather continue the conversation in the public space of a new post.

Here is Baroness Altmann, who spent most of 2020, working on the Pension Schemes Bill and who’s understanding of the legislation is second to none.

In recent blogs, I have suggested that large DC schemes could use CDC as the default pathway.

I hope you don’t mind me commenting here Henry, but I worry about CDC operating in a world of pension freedoms and misleading members into thinking they will indeed know what pension they can look forward to for the rest of their life.

There is a real danger of older members selecting against younger members, taking money out of the fund if markets have performed poorly (but before this is fully reflected in transfer values) and there is no provision in CDC as it has been introduced, for risk margins to reduce the value of transferring members’ share.

Ros is also worried that a default pathway will reduce conscious decision making and the imposition of  a blanket wage for life will not fit well with individual circumstances.

I also think that just considering age and size of fund is not enough to make good choices – the person’s health, other pension income, work status and financial position (debts, mortgages, family commitments etc.) are also important to consider. This is not something that CDC will deal with, especially the situation of someone in poor health, which was a big problem in the old mandatory annuitisation world.

While I can see hazard in Ros’ first two points, I am less clear about CDC as a means of “locking into an income for life”. The scheme pension granted to someone transferring retirement savings into a CDC scheme should be based on long-term expectations and not be driven by the short term factors that determine guaranteed pensions. Of course this will mean that CDC pensions will be set higher than annuity rates – leading to outcry from those who do not believe in anything but gilts as a means of securing pensions , but that is the bargain that CDC offers.

The current low interest rate environment and risks of higher inflation also need to be considered if choosing to lock into an income for life right now.

Ros, then moves on to the role of Pension Wise and here we are in complete agreement. Thinking of pension money as income replacement rather than supplement is good thinking.

If Pension Wise can encourage people to consider pension money as an insurance against living too long, it will be providing a very valuable public service. Perhaps MaPS can comment on whether this is guidance that is regularly given?

In addition, I do think Pension Wise could and should be offering a very important service to those considering transferring or withdrawing pension money. The best message these people can be given is – don’t take money out when you’re still in your 50s and even into your 60s unless you desperately need to.

Ros’ final point is interesting. Most people underestimate their capacity to go on living and while this makes annuities unattractive to younger people, it makes them much more sellable to those in buying mode in later years. But how many people in their 80s are going to swap inheritable cash for a non-inheritable income for life. The emotional pressure for most of us, is guilt – guilt about our heirs!

Equally, I believe most people should not buy annuities until they are well into their 70s or 80s, when the mortality cross-subsidy can be more effective.

I worry about this idea of later life choices and while I know a lot of old people who are independent of mind, they are outnumbered by those who are mentally infirm and dependent on younger people for care. How many people exercising powers of attorney will purchase annuities for those they act for?

Gareth Morgan

Another commentator on this blog is Gareth “the Ferret” Morgan and he has been in commanding form this week.

“Rather than putting people in financial harm’s way… provide people with a financially healthy way forward that pays them a pension without them having to buy an annuity?

…. the variants – cash, annuity and DIY drawdown would be self-select options and only accessed where an individual wanted to make a positive choice.

This may seem like a return to the bad old days of compulsory annuitisation, but it is not. The annuity was the only option unless you could prove you had adequate income elsewhere. The opt-out proposal I’m mooting simply follows the tried and tested approach to pensions which is to put the onus on people to opt-out and not opt-in to the right decision.

…Where these proposals will meet with most opposition will be from scammers”

While I’m fairly sure that I’m not a scammer, I’m going to oppose this – but … with a big BUT..

When you put a default in place with an opt-out you have to put something else in place, that you haven’t mentioned.

Informed choice.

Your default may be good for the bulk of people but it will bad for a substantial minority, who would be much better off using drawdown. Those include, as you will know from my too frequent witterings, those receiving means-tested benefits. Even worse, those entitled to, but not receiving means-tested benefits; remembering that about 40% of households entitled to Pension Credit, don’t get it. A figure that’s been substantially the same for the last decades.

That informed choice, under your proposal, needs to be made in two ways.

Firstly, if someone is going to know whether they should opt-out then there are a couple of things that need to happen. They need to know that there are alternatives and that they need to consider them. It needs to be a positive decision not to opt out. Whatever they decide has to be an informed decision. That’s just not possible as things stand.

If you want the decision to be the best for you, as an individual, then you need to know what the results are for each option. In one way that’s complicated and difficult; there are a large number of different ways to use your pensions savings and the results of the pension / tax / benefits sums will be different for each individual. In another way that’s simple, there are systems on the market that do all of that simply and cheaply (advert).

You probably won’t get the information you need to make a proper choice though, particularly if you’re being nudged to Pension Wise, because they’re not allowed to give that sort of individualised information. So you end up with more people being sent to get guidance that, in the end, boils down to ‘we can’t tell you which type of choice is best for you’.

That’s the basis that you think people should then use to decide on opt-outs?

The second informed choice, perhaps, should be by the provider. Why does the default have to be the same for everyone, rather than a default based on what the provider knows about the individual? A couple more data items collected from the saver could refine the type of default choice pretty accurately. It wouldn’t remove the need for better information but it would reduce the amount of damage, if, as seems, likely, the information isn’t there.

To me “informed choice” – which is what guidance aspires to, is the solution, where is the resource to provide it. Gareth’s software is available on a number of websites and used by many advisers, especially those advising on equity release, but it is  not, as far as I know, being promoted by MaPS and Pension Wise and so many people are self-harming their finances by missing out on state benefits when they exercise the wrong pathway.

Should providers have a duty of care to those who follow their investment pathways to ensure they are not self-harming? Can individual defaulting work with “a couple more data items” and can Pension Wise raise its game to ensure people get to a position where they consider their retirement income in the context of their circumstances?

These are precisely the questions that Ros is asking though Gareth focusses on the financially vulnerable rather than the financial cross subsidies within products like annuities and CDC.

The role of the state

To me, the state is capable of influencing people’s behavior through legislation and we have seen how its rules impacted those who cashed in their DC pots prior to the freedoms and after. The simple imposition of a few lines in the 2015 Finance Act has been much more powerful than all the guidance given by TPAS, MaPS and PensionWise.

We know the Treasury are terrified by their power, by their temerity in introducing pension tax relief reform. It would seem that the best solution is the status quo because that is lowest risk.

But there is a danger in allowing the market to dictate flows and that is that eventually the money runs out and much larger intergenerational issues arise.

Yesterday, the Government pledged yet again to address long term care, but yet again it is doing so with no clear plan of what it is intending to do, who will be paying for who.

This is how it seems with pensions too. These long comments from Ros and Gareth and this long blog are addressing the consequences of an unthought- through approach to long term problems of increased longevity and inter-generational risk transfers.

I am not convinced that Pension Wise will ever have the capacity to influence behavior so that people take informed choices of the type Ros and Gareth want them to. I do not see the 700,000 people leaving the workforce to retire each year beating a path to a financial adviser.

We need as well as guidance and advice, a strong default and we need to ensure that as few people are harmed by that default as possible. In my view that default needs to be a wage for life solution – an AgeWage. We are not going to return to annuities as the default – but collective DC scheme pensions look a real alternative.