9 million pension savers marching down the hill!

Phil Boyle and Steve Webb; co-authors of the LCP report

Is Steve Webb, pension’s Grand old Duke of York.? Having marched us to the top of the hill and is he preparing to march us down again?

LCP’s paper on how we spend our pension pot asks “is there a right time to buy an annuity“. Part authored by a former pensions minister it also focusses on the potential policy implications of these findings.

How can and should people be ‘nudged’ to review how they are managing their money in retirement and whether to switch to an annuity.

LCP don’t say this but it does need saying. “For how long can we have a highly regulated “rules-based”, retirement savings regime, followed by a decumulation free for all?”

The Treasury incentivises savers to march to the top of the hill and then looks to recover as much of its money as we’ll let them on the way down. The investment pathways that have been offered so far, seem to being ignored as are the mountain guides at Pension Wise.

And while 9m of us are going to be accessing our DC pots over the next 10 years, an increasingly small number of us will be getting paid a pension from a sponsoring company’s payroll. For most people in defined benefit pension schemes, the chances are we will get paid your pension by an insurer, the PPF or – hopefully the new superfunds. Some multi-employer DB schemes may persist but most (plus Clara)  look like feeders to those with greater appetite to pay pensions.

Immortal- invisible – God-only wise

Only the state sponsored pensions  appear immortal , invisible and “God – only wise”. It’s possible to be God-like when you have scale. But the state pension system is almost entirely unfunded and therefore immune from the funding considerations that persist for corporates and individuals.

(To understand the inefficiencies that funding brings, you needed to have spent a little time at Pennyhill Park last week. With the exception of the PPF, state funded pensions continue to enjoy the champagne-lifestyle of yesteryear. But the pool of excess is shrinking.)

Back in the 1990s Barbara Castle quoted me in the House of Commons, saying that all private pensions aspire to the efficiency of SERPS. I am proud I said that in a submission to Government , though it did not make me any friends at my then employer – Eagle Star. It was not me that had that thought, it was the late lamented John Shuttleworth.

The State is not just the ultimate benchmark for an efficient pension system, it is potentially the arbiter of how the private pension system runs. When George Osborne changed the tax rules in 2014, he gave up that responsibility to the pensions industry.

Resetting the rules?

Steve Groves, who was CEO of one of the insurance companies most impacted by pension freedoms has good reason to feel aggrieved that the man calling for the reset , was the man who took credit for the destruction of the old regime where people had to buy annuities.

Here is Steve’s response to the LCP paper-

 this report is like a fox authoring a paper on the extinction of gingerbread men; it may be correct but had the fox not eaten them in the first place (coincidentally also to fulfill its short term desires) the problem would be much easier to fix.

If as Pension’s Minister Steve didn’t understand mortality drag or that the variance around life expectancy increased as life expectancy decreased he should hang his head in shame, if he did and went ahead with Freedoms in the way he did anyway he should hang his head in shame…

As for the prospect of new products emerging as a result of LCP’s research, he is equally scathing (the final paragraph is addressed to me).

It’s been 7 years since freedoms and broadly the choices are the same as they were before freedoms. As I say, the providers have written their Dear John’s and moved in with the extremely shapely bulk buyout market two doors down. If you’re holding your breath for a breakthrough product your face is going to get awfully blue!!!!

For me this paper was depressing, it just highlights how badly thought through the 2014 reforms were, they hollowed out the technical capabilities of the industry and now it’s gone they have worked out they needed some of it.

It also amazes me how reluctant people seem to be to call out the architects of the current situation for acting rashly and ignoring the feedback they were given at the time.

How about you ask Sir Steve why it wasn’t considered in 2013 rather than congratulate him for waiting to 2021 to state what people working on annuities in the 1990,2000s and 2013 knew at the time?

It is hard not to sympathize with  Steve Groves’ position, but equally hard to know where sympathy gets you. If it takes a former pension minister, to sway a current pension minister, then so be it. Barbara Castle is no longer with us, but we continue to have dissenting voices in the House of Lords, if not in the Commons.

But is there any real appetite in the DWP to sort the problems we have accessing our pension statements. The standard of debate in the recent WPSC meetings was poor, thought leadership in parliament appears to be focused on other matters and the total number of people working on CDCs in the DWP is reported to be “three”.  If I was Royal Mail, I would be getting a little “blue in the face”.

Order Order! Will Government or the markets get pensions back in step?

Despite Steve’s withering skepticism, I am not blue in the face  from holding my breath- yet! But as a 60 year old with a couple of DC pots – I might be soon!

Insurance companies know where their strengths are – they write longevity business in bulk and make money from the difference in the price they charge and the experience they attain. Life companies do not influence mortality, but they can invest to get better than priced for returns (by taking risk on their balance sheets). Banks can do the same.

9 million people is the kind of bulk prospect that inspires the association of British insurers and if that prospect doesn’t grab them, expect some of the large global players to enter the UK market. Expect those active in the non-insured market, most notably the Pension Superfund, to be paying attention too. Many banks and private equity firms will be using their balance sheets if given the chance.

What is lacking, for change to happen, is the kind of thought leadership that used to be the trademark of pension policy. We look back to the 1970s and 1980s where the pensions debate included Barbara Castle and the Unions on one side  , Keith Joseph and Margaret Thatcher on the other. There are those who read this blog, Bryn Davies for one, who understand the importance of getting pensions back in step.

Which is why we have to ask Steve Groves, what he expects to happen, if we can’t find a way to get order back into decumulation. Steve is no longer CEO of an insurance company, he is Chair of an investment platform managed by an insurance company. So we might be hearing more from him on “solutions”.

I am well known for my view that the alternative to insured annuitisation is self annuitisation as pioneered in Australia through the LifeTime Pension offered by Q-Super (and soon to be piloted in the UK by Royal Mail’s CDC plan). Here the need for an insurance company is limited and there is much more dependency on the pooling of risk within a trust governed pool that look like what used to happen in occupational pension schemes. Except in Australia, the link between member outcomes and the money paid into Super, is determined by individuals – not employers.

Q-Super uses a captive insurer where insurance is needed but is primarily relying on its scale to provide self-annuitisation and the investment engine to meet its member’s expectations.

Let’s be clear, most of the innovation likely to happen to the longevity market is not being driven by Government or even by well meaning employers. Solutions for the 9m who are needing better ways to spend their pension pots is much more likely to come from the commercial sector than from some benign vision of not-for-profit mutuality or a return to the unfunded vision of Barbara Castle (and John Shuttleworth).

I suspect that LCP know that too and that Steve Webb could see that a long time ago.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to 9 million pension savers marching down the hill!

  1. Brian G says:

    Even Billy Burrows says out loud that annuities are not worth buying right now. You can’t just invent a financial instrument that gives sufficient guaranteed returns to insurance companies so that they can offer higher rates. If you look at annuity rates they are so poor that after the insurance company takes its profits there is virtually a zero interest rate. CDC could be an improvement on that by investing more in risk based assets and offering non guaranteed income, but it doesn’t offer overly great death benefits. One of the things pension freedoms has done is lower the publics resistance to saving in a pension. Because in theory they can have their money back when they are over 55 they now see pensions as a positive idea to save for the future. So you are getting a much lower rate of opt outs from AE. Whilst it takes time to build up larger pots there is now much less resistance to saving in a pension. So that when someone comes to retirement people in future are likely to have a bigger pot to spend than if the old rules still 3xisted. Annuities used to be unpopular due to ignorance about longevity risk and their inflexibility. Now they are unpopular because of unattractive returns as well. CDC may well improve returns but CDC is not a panacea for all ills.

  2. Pingback: The OECD double our pension expectations – we all need to read the small print! | AgeWage: Making your money work as hard as you do

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