Of all the time wasted talking about pension dashboards, the time wasted on “estimated retirement income” irks me most. It is not the sight of actuaries arguing over annuity and growth rates that irks me , it’s that the idea that these pension pots that have been building up in our names will magically convert into a wage for life – aka “my pension “.
When Osborne pulled the plug on auto-annuitisation, he handed pensions trade bodies like the Society of Pension Professionals a poisoned chalice. The hope was that outsourcing the nastiest hardest problem in finance to clever people like Paul, would mean that people could have pension freedom and financial security in retirement.
They have one but not the other, they have the pot but not the pension.
There are two problems with pension pots, the first is that they aren’t full enough with savings and the second is that there is no way they can meet people’s expectations for what they can buy. Indeed many people have never stopped to think that they have to make any kind of purchasing decision to get their pension because we have taken the phrase “money purchase” out of circulation.
So when an actuary comes to frame an estimate of retirement income he or she is using a set of tools that are no longer in circulation
- A projected growth rate on a pension pot based on a theoretical yield from Government Debt
- A projected income from the pot based on an annuity rate derived from the yield on Government debt.
This is fantasy finance and it’s based on a lie that is still being peddled by the pensions industry to its public. The lie is that our workplace pensions are pensions. They are not, they are at best a means of purchasing a discredited financial instrument called an annuity and at worst a pot of money that is prey to financial charlatans.
My Eritability is based on the Estimated Retirement Income being a way of pulling the wool over the eyes of the common saver. It is talking to the past not the future, it is failing our customers reasonable expectations and discrediting our pension system.
We want to give our customers quotations not illustrations but we cannot quote for the future (that’s God’s job). The best we can do is a “best estimate” based on best endeavors. Right now that’s investment pathways, but people want to travel on a motorway.
Here is what people should be reading when they see their pots on a dashboard.
WARNING – these are pots not pensions.
You can buy a pension with your pot, but you won’t get paid a lot.
Or spend it as you choose, your money’s yours to lose
You can roll your savings up, but the bills aren’t going to stop
Or keep working for a while and ask fortune to smile.
I’m wishing you good luck, but don’t give a flying f**k.
This ditty may sound harsh but it’s what all this ERI comes down to. And if that ditty did appear on the dashboard as the “next steps”, I reckon it would properly reflect the feelings of many people faced with impossible choices on how to turn pot into a wage for life.
A better way
The reason the average person reaches the end of their working lives with lots of little pension pots and very little pension is that the state gives them very little pension and pots don’t give you a pension at all. Pots give you a headache.
So we should be focusing on sorting out the State Pension so it gives people more, helping people work out what retirement’s going to look like (a job made a little easier by last week’s announcements on care) and finding a way to allow people to convert their pots to pensions at a better rate than an annuity and with greater certainty than DIY or advised drawdown.
The AgeWage we can promise people via an ERI must be better than the illustration of what might be purchased in future years based on assumed returns from gilts.
The AgeWage must be based on the reasonable long-term estimates on growth within pension funds, what Con Keating and Iain Clacher call the CAR (contractual accrual rate).
The CAR is the best estimate of what a pension can do for you and it is based on market returns from investment in real assets over a long long time. The contractual accrual rate is what the pensions industry should be promising from pensions with the conviction that comes from achievement over decades. Pension funds have returned considerably more than gilts over the past 70 years because they take on and manage risks that shorter term investments cannot.
And the CAR should be implicit in the payment of pensions from collective savings arrangements such as master trusts and large single employer CDC schemes such as Royal Mail’s.
This is not fantasy, this is the logical outcome of establishing CDC pensions and whether the CDC pension manages the growth in savings and the payment of pensions or just the payment of pensions (decumulation) , it should be underpinned by a contractual accrual rate determined by the pensions industry, agreed with the Pensions Regulator and applied consistently.
And the CAR should govern estimated retirement rates.
We need a pension motorway not poxy pathways!
When my Dad used to come to London from Shaftesbury he took us in his mini up the longest country lane in England, for years wee could see from the A30 a lot of bridges built in the countryside outside Thorpe in Surrey. My Dad would say, one day there will be a motorway that will go under those bridges and one day there was. It was the M3.
We have built the bridges that make it possible to lay down a new highway for pensions. Not some poxy investment pathway but a proper pension motorway!
That highway could connect us to master trusts that will offer us scheme pensions designed around a common CAR that paid pensions designed around our needs and not those of the pensions industry.
The pension superhighway would be a wage for life with insurance against living too long provided by all the others travelling the highway. Mutual insurance of longevity through pooling can be managed by actuaries provided they have sufficient numbers in the pool and with 19m savers facing the task of turning pots to cash in the next 25 years , we have no shortage of travelers.
While we travel, our savings will be powered by investment into real assets, investment into the long-term equity of companies, into social housing, into the development of new businesses and into the innovation we need to save the planet from the impact of a changing climate.
It is time to come clean about the shortcomings of our workplace pensions which aren’t pensions at all. We need to tell our customers to be patient as my father told me to be patient. We have the bridges and the motorway will come!
AHH but Henry will that be during our lifetime??
Your Eri-tation should not surprise us given the eristic nature of industry approaches to decumulation. Merriam Webster offers the following on that adjective: Eristic means “argumentative as well as logically invalid.” Someone prone to eristic arguments probably causes a fair amount of strife amongst his or her conversational partners. It’s no surprise, then, that the word traces its ancestry back to the Greek word for “strife.” Eristic and the variant eristical come from the Greek word eristikos, meaning “fond of wrangling,” from erizein, “to wrangle,” and ultimately from eris, which means “strife.”
Developing agreement on what may be said to savers is no simple matter. A single point in time fixing of retirement income will itself be highly volatile, to which must be added uncertainty in the amount of money that will be available for that conversion. One of the great attractions of the lifetime CDC model is that it averages much and reduces the uncertainty faced by a saver. However, that should not be taken as a blanket endorsement of decumulation CDC – that is superior to the drawdown/annuity dilemma currently faced but not as good as the lifetime CDC variant.
It would though be possible to inform savers as to the retirement income that could be achieved today (under CDC conditions) given the current value of their ‘pot’.
I particularly like the last paragraph
Good Morning Henry, your ERI-tation hits the mark superbly.
These are words the Pensions Industry (or should we call it the “Savers” Industry) needs to hear. At present the DC world is not delivering pensions, and with auto enrolment reaching its 9th birthday in a couple of weeks one has to hope it reaches adulthood in the next nine years. CDC has the potential to turn the ugly duckling into a beautiful swan!