Would you countenance a pensions pay-cut?

We all want an annuity- we all hate annuities

Back in the early noughties, Watsons had a powerful team of thinkers who had cottoned on to the problems of moving from DB to DC pensions. The insurance and investment teams came up with an idea they called the “unit linked annuity” which , while never quite getting off the drawing board, always seemed a good idea.

The idea was that, where people wanted their pension to be paid based on market returns, rather than the rate deemed by their insurance company, they could float their pension payments, getting a pension that was set each year based on what a unit-linked pension fund had achieved in the year(s) before.

And if enough people were buying into this, the pool of people could self insure their life expectancy meaning that older people would get paid out for longer and people who died younger, could pass on some or all of their pension to their spouses.

The idea was a little ahead of its time but it just about lives on in obscure corridors of the actuarial establishment. You can still see it advertised on the Association of British Insurers website

A unitised annuity is a type of investment-linked annuity where the retirement income paid to you is linked to the performance of units in investment funds. Your retirement income may vary depending on how the investments rise and fall.

I’ve long been surprised that we are prepared to save for our retirement using funds that rise and fall but when we get there, suddenly need a guarantee on the income we receive. Morten Nilsson, then CEO at Now Pensions and now CEO of BT pensions told me back in 2014 that he couldn’t understand why retirement income was the one type of pay that could never go down. He’s right, who’s ever heard of a pensions pay-cut?

The possibility of a pension pay-cut is neatly sidestepped by the wealth management industry who now talk of retirement planning in terms of tax management, wealth preservation and estate planning. The idea of income drawdown is not to pay an income for life but to form part of a holistic retirement plan that does a whole lot more than pay the bills. I get it, this is right for the mass affluent who have the means to both plan for the next generation and pay the advisory fees.

Pension Draw-Down risks people taking more than a pay-cut, it risks people losing their pension income altogether, that’s like losing your job when there are no jobs to go to.

But drawdown caters for an elite section of society who need not fear this risk. For the affluent, pensions are an additional source of wealth while for most people, they’re the wage in retirement.  Estimates vary, but no more than 20% of people in retirement have access to a financial adviser and rather less properly use the financial planning services they offer.

Most wealth management drawdown programs end up being set and go with little but the lightest touch on the tiller. Whether they can survive the vicissitudes of 30-40 years at sea on the markets is open to question, but the point is there are lifeboats for the wealthy that means a pension sinking doesn’t matter (so much).

But for the less affluent, the buoyancy of their pension matters a lot

I often think that many income drawdown plans would be better managed collectively as a unit-linked annuity. Perhaps some of the larger SIPP providers will consider this in future but I see no sign of collective solutions in retirement establishing themselves soon in wealth management.

The rest of this article looks at how those with pension savings might find a way to find a retirement solution that offers them buoyancy and a decent income to boot,

Q- Super and the Australian experiment with unit linked annuities

In Australia, where DC wealth is a matter for most households to consider, the issues are more advanced. According to Brnic Van Wik, the problem for Australians in Q-Super, the pension scheme for which he manages assets and liabilities, is working out how much of their pension pot to spend. Many of his members end up less than they could and die rich live poor, others run out of money because they draw too hard on their funds but they are in the minority.

Q-Super has come up with a default plan for the people their members who find it too hard to manage their own affairs. They call it their Lifetime Pension product

You can watch Brnic talk about the solution he has put in place for Q-Super members

Watch here

Guess what! It’s that old idea dreamt up by Mike Wadsworth and his team (including a young David Harris) that people can collectively insure each other against living too long and pay each other an income for life based on market rates – the investment linked (or unit linked) annuity.

As a sidenote -the only element of external insurance in Brnic’s plan is a guarantee that every estate will get back the price they paid for the annuity (the capital less income already paid to the prematurely deceased). This is insured by a whole of life plan taken out by Q-super , the premium for which is paid from the general return. Apparently this was introduced because of feedback from clients who claimed that Q-Super stood to gain from people dying too soon. I’m not sure that this is needed and a rival to Q-Super – Challenger Super – is setting up a similar arrangement without the guarantee.

Is this CDC?

If you listen to Brnic, and I urge you to do so, you may well ask yourself, what is the difference between the Q-Super retirement solution and what we are beginning to talk about as “decumulation only CDC”. Well apart from the very clumsy title we give DOCDC, not very much. If you think of the Challenger Super variant, nothing at all.

I described it when Brnic was talking live as CDC without the actuaries which was stupid of me because Brnic is an actuary and so was the host , NOW Pension’s Stefan Lundbergh. But the marketing point is that Q Super seem to be marketing their retirement solution without the actuarial guff that bogs down most of the debate

As Stefan puts it in a recent post, lamenting the complexity and over-ambition of Dutch CDC plans,

We learn from our own mistakes, but it is much faster and cheaper to learn from other peoples’ mistakes. The Dutch journey is a priceless lesson for anyone interested in Complicated DC, since they researched every facet of CDC and, as a consequence, took important steps towards a more robust version of it. The conclusion? CDC is not the silver bullet that will solve the UK’s pension issues, but it does offer attractive components for draw-down solutions. Perhaps it is time for the legislator to explore the possibility for UK master trusts to develop pay-out alternatives that include pooling of individual longevity but without capital guarantees?

I would drink to that, and so would Brnic and his competitors in Aussie Super-land.

The dark evidence of the failure of UK retirement planning is in the FCA’s retirement income market data  which shows that most people are not even beginning to turn their pension pots into pensions. Further evidence can be found in our large mature DC occupational pension schemes, many of which have large numbers of people in them who have completed their lifecycle and who sit in bonds and cash neither spending their savings or investing them.

I will be writing to the Pensions Minister who tells us he is off to talk to the master trusts, and I will be sending him the link to Brnic’s talk, because the Q-super solution is a solution that could be adapted and adopted in the UK as CDC 2.0.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Would you countenance a pensions pay-cut?

  1. Pingback: Would you countenance a pensions pay-cut? – SHOPPEX NIGERIA

  2. Adrian Boulding says:

    I see a lot of what consumers both want and need in Q-Super’s new idea, which is live and selling well to non-advised customers. They get an income for life and in exchange for accepting that it will be reviewed annually and some years will go down, they are expecting a rather higher income than annuities because they don’t have to pay tithes to the owners of the swathes of regulatory capital that guaranteed products rightly require. I’m sure advisers will promote it too in good time, but Q-Super have only just woken up to the fact that advisers don’t recommend even good solutions if their toolset does not recognise them.

  3. henry tapper says:


    There is an argument that where people are participating in an investment product, people should be advised before joining. Do you think this looks like a non-advised drawdown product and should people have the right to a transfer value if they don’t like the experience of an annually variable income?

  4. henry tapper says:

    And more specifically, can you see it being the default investment pathway for a master trust?

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