A few of my cronies shared screens yesterday evening to discuss “post retirement issues”. I think it was the alert Mark Thompson who pointed out that “post retirement” comes death so we decided “in retirement” was a better phrase. The point is a good one, retirement is not a date but a change in the way we spend our time. And how we spend our time is linked to how we get paid as we switch from a reliance on a pay-cheque to a reliance on an age-wage, whether that be a formal pension , a reservoir capital or income from owned assets such as property.

Despite personal pensions having been around for nearly 35 years, they have not produced the wealth that might have been expected when Norman Fowler dreamt them up in the mid 1980s. This is because few employers have sponsored them as they have chosen to sponsor defined benefit pension schemes – with meaningful contributions and because those without access to any form of employer sponsorship have chosen not to divert a proper amount of earned income into retirement savings.  Relative to expectations, personal pensions have been a failure and they are not today the central building block of people’s retirement planning , my generation of advisers had hoped they would be.

But they have become essential to the mass-affluent. SJP has 300,000 of its customers drawing down from their self-invested personal pension.  They are the Daddy of the SIPP providers and along with Hargreaves Lansdown and AJ Bell, dominate the market for wealth. Most wealthy people use financial advisers , though it’s interesting to see Vanguard entering the market with a SIPP that it claims is the lowest cost platform for those with less than £100,000 to drawdown. I will be reporting on its IGC’s first report which has just been published.

Like Pension Bee, Vanguard is not pretending to know its customers well enough to offer them advice, so instead of advice comes guidance in the form of investment pathways which lead investors either to an annuity, to short-term encashment , to drawdown or to the roll-up of the fund to leave as a legacy. Vanguard’s chair was able to send a copy of its Chair Statement to all who had chosen to follow the pathways, not such a proud boast when to date only 5% of Vanguard’s mature customers are following these pathways . I am told that together they would not full a double decker bus.

The take up of pathways is not of course obligatory and those who choose to self-invest are likely to self-select a retirement strategy without advice or guidance. This is the paradox of personal pensions; they have become the financial playground of those who know how to use the financial services industry . As Lawrence Churchill, Vanguard’s IGC Chair puts it

Vanguard believes (and the IGC has seen no evidence to
challenge this belief) that its customer base is likely to be
weighted to the mass affluent and high net worth cohorts
who are likely to be investing only part of their total wealth
with Vanguard and whose investment beliefs coincide with
the funds which Vanguard offers

It is surprising that , despite the market evidence being to the contrary, the Government and in particular the regulator of personal pensions – the FCA – continue to promote “choice” as a key way to get personal pension savers best value. The Money and Pensions Service has re-launched a price comparator for the various market offerings (it doesn’t include Vanguard)

Understand and compare your investment pathway options (for pension drawdown)

I am not (here) going into the rights and wrongs of this kind of guidance but I do wonder what demand there will be from personal pension savers for shopping around.

Shopping on price assumes uniform value which is a dangerous assumption when you consider the variability of outcomes from the strategies behind these investment pathways. Indeed the reason for the FCA requiring the providers of these pathways to have independent governance committees is to ensure that savers get value for their money.

We are expecting to hear any day now, what the FCA and tPR’s latest thinking is on the assessment of value (it is well over a year since it consulted with us on this subject).

I hope that in their response , they will make clear suggestions that ensure that people who are using investment pathways do not have to shop around but can be assured that the investment pathways offered on a non-advised product like the Vanguard or Pension Bee SIPP are fit for purpose and can demonstrate value as well as price.

But there remains for me a more fundamental problem with personal pensions, advice , guidance and pathways and that’s to do with the financial literacy of the bulk of the nation that is simply not up to making choices on which pathway to follow, let alone which pathway provider to use. The very use of the word “investment” scares the hell out of many non-financial fold who do not want to invest and are quite happy with saving and getting paid a wage from their savings when the time comes to stop working.

Most people do not want to make investment decisions about their retirement savings. If those who have the wealth to be advised, choose to pay advisers to help them make these decisions, how do we expect those excluded from advice to take these decisions on their own?

What is needed is a default pathway for small pots which converts pots into pensions in a cost-effective and dependable way. This is what commercial master-trusts should be thinking about. And they should not be limiting their thinking to consolidating failing DC schemes, they should be thinking about offering a safe haven product for the millions of small pots that are in need of conversion to a wage for life solution. This is where CDC becomes properly useful.

Most people don’t want or need choice , they need someone to take their hand and show them how to replace the income they got from work with income they get from savings. It is as simple as that.

The right path for your personal pension pot – is a pension.