What’s missing from our pension choices at retirement?


The Work and Pensions Select Committee have asked ten big questions about how the pension freedoms are working. If the collective answer is that the pension freedoms are working badly, then there are further questions to be asked like “can the state pension pick up the pieces and become a safety net?”

In a series of blogs, of which this is the first, I’ll be thinking about each of the questions , both in terms of the “received ideas” and in a more imaginative way.

Here is the first question put to us by WPSC’s Chair, Stephen Timms.


Do people have access to a range of pension options to meet their needs for later life and how might these needs change in future?

People have access to receiving their money saved in pension pots, as they chose, so long as they have reached  55 (soon to move to 57). People can take their pot as cash , draw the money down over time as an income or guaranteed themselves a wage for life by buying themselves a lifetime annuity. These options are known as the investment pathways and they are supplemented by a fourth – where the money rolls up and passes to the next generation on death.

In the past, people in defined benefit pension schemes usually had a further option , an opportunity to exchange the value of the DC pot for more pension from the scheme. This involved a rate of exchange between pot and pension decided on by actuaries and ratified by trustees. If things went wrong, the bill ended up with the sponsoring employer who met the balance of costs. When the cost of paying pensions rocketed , the cost of these scheme pensions rocketed too and the exchange process was dropped.

I mention this because the concept of buying back pension pots and paying pensions had a lot going for it, had it not been for the legal impact of the pension promise which was tantamount to a guarantee. It certainly had to be accounted for as a legally binding promise and these promises sit awkwardly on corporate balance sheets to this day. But members enjoyed an income for life, the certainty of an income that lasted as long as they did (and often additional protection for the spouse). Finally, these extra scheme pensions were inflation proofed -which made them as much as a third again more valuable than the equivalent level annuity.

If only they could have been paid without the full promise, scheme pensions might have been a further option for people with pension pots. It was partly because these pots could purchase pension from a DB scheme, that they were called “money purchase”. Losing that capacity was a big setback for DC pension savers (though nobody thought so when the option at the time.

What’s missing?

Today people have the choice of a guaranteed pension , cash or drawdown but none of these can remotely match the generosity of the old scheme pension exchange. This is because the old scheme pensions were paid from funds that were invested for the long-term and the actuaries used long-term growth factors to discount the present cost of the future liability. This made scheme pensions cheap to buy and though the actuaries were wrong to assume that the old accounting assumptions would last, they were right to think that in time , schemes would be able to meet their liabilities so long as the assumptions held good.

Actually, the assumptions have held good and had schemes stayed invested for growth these scheme pensions would not generally have required employers to dip into their pockets, that happened because of mark to market accounting, which is where the system fell apart – the point of mark to market accounting is that it assumes that the promises could fall due on any day. To meet this accounting assumption, schemes forsook their long term investment strategy for a means to cover the accounting liability.

So we are now missing an option to have our pot paid as a pension by a scheme. That is what is missing!

How do we get back to where we were?

It may sound over-simple, but if we went back to where we were before we made defined benefit promises a virtual guarantee, then we had a system where people gave their money to trustees in return for a promise of their best endeavors to pay the scheme pension as advertised but no guarantee.

To get back to where we were, we need to return to this world and give people the option of exchanging their pot for a non-guaranteed scheme pension paid by trustees with their best endeavor from a mega-pot which is capable not just of providing more pension on exchange, but sustaining that advantage over time and paying out to the last syllable of the pensioner’s recorded time.

CDC scheme pension – coming soon.

This scheme pension option is not available yet, but it could be coming soon. It could be that the larger master trusts with plenty of big pension pots within them, could choose to offer scheme pensions to their members and offer new membership to people who chose to transfer their pots into the master trust.

This could be a commercial activity so long as the scheme pension could be varied over time to meet the capacity of the scheme to pay. Trustees could use their best endeavors to make sure the expectations given those buying these scheme pensions were generally met but people would need to understand that there would be good years as well as bad.

We know that our incomes don’t always go up and that we may get over-rewarded some years and under – rewarded others, due to factors beyond our control. If people could accept that a collective pension scheme paying scheme pensions from one  big pool will generally offer better pensions than an annuity or a drawdown, then scheme pensions could become an attractive option again.

So my answer to the first question is that people don’t get the full suite of options they need and that’s because we’ve lost scheme pensions. We could get scheme pensions paid in exchange for our DC pot, but we’d have to accept this would involve the risk of the scheme pension going up and down. Scheme pensions could be back on the table quicker than you might think if master trusts and other large DC pension schemes converted in full or part to CDC.

As for the second part of the question, I will not use a crystal-ball. I have no idea how my spending needs in the future will change, I just want to be sure that I have a basic wage in retirement sufficient to meet what I need right now and that I have some protection from inflation.

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 What’s missing from our pension choices at retirement?

  1. Peter Tompkins says:

    Thanks for these posts. I have the feeling that this inquiry will be quite important in its analysis though obviously as a setter of mood rather than law. Select committees do have influence so it is worth responding. The problem I have is I’m not really sure what to think!

    Ideally people need to be a) well informed to make their choices and b) have efficient products to deliver them. I think I have a) from my training but I’m not sure about b) where what I probably need is a product offering me boxes to choose tax free cash, drawdown payments and annuity purchases in a sensible combination. Instead I feel like I have various piggy banks I can raid at random and probably not in too well coordinated a fashion.

    I’ll check out what my profession is doing to respond.

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