As someone who has priced drawdown and annuities I can tell you the NPV, RoE, RoC and DPP are far more attractive on drawdown and asset management than they were on Open Market annuities.

Why else do you think there has been so little product innovation since 2013? 😝

— Steve Groves (@Sjg3G) November 29, 2021

I don’t doubt Steve Groves is right, he was the CEO of Partnership which was an annuity provider and now Chairs a fund management platform. Clever people know where the money is being made and Steve is a clever person.

But Steve is more than clever, he is honest. He is prepared to call out the pensions industry for failing its customers and in doing so , expose regulators who create a  “waterbed effect”, driving costs and charges down on one side only to see them rise on the other.

This is what is happening in the DC pensions market where the cap means savers are getting value and uncapped drawdown, where asset managers get their own back.

Those insurers who relied for distribution on people having to annuitize to get their pensions back have moved on.

…It’s gazed out the window, seen a younger and beautifully endowed Bulk market two doors down. It’s penned a Dear John letter and it’s closed the door gently on its way out.

Freedoms haven’t driven innovation, they’ve caused the market to go do something else.@jeffprestridge

— Steve Groves (@Sjg3G) August 14, 2019

What we have been left with is not innovation , but some newly-packaged versions of what we always had known as “investment pathways”.

The question is “if not now – when?”

If for the past 7 years, confusion has reigned, shouldn’t we be calling “time” on that confusion and belatedly setting about creating order out of chaos and value for our money?

Drawdown doesn’t have to have high ROE, NPV etc. (insurance company measures for reckoning value to the shareholder). It might offer high value to members of the retirement schemes we devise in the future. Whether those schemes are offering guarantees or not, they can operate with lower distribution costs, lower support costs, lower operational costs and lower margins to the shareholders, provided the customer is put first.

But so long as there are layers of intermediation between the people who devise the products and those who buy them, there will be mouths to feed and each layer of marketing distances the experience of the customer from the source of value. Stripping away the various platforms and wrappers so that consumers get the sausage (not the sizzle) means a different kind of innovation.

For instance, retail pricing of annuities and drawdown, could be replace by wholesale pricing , with trustees ensuring that the product purchased is value for its members. Trustees could establish investment pathways that led to products that were innovative in the ways being explored in LCP’s recent report. Or indeed , they could create their own solutions (when the CDC regulations allowed).

The demand for these products is here. Like the demand for change in other areas – most notably the way we manage our climate – the reaction to demand lags the need for change. But that is why we need leadership, why we have people who are prepared to speak out. Steve Webb and Phil Boyle spoke out at LCP, Steve Groves (while moaning about Steve Webb) has been speaking out for many years, I am merely chronicling dissent.

But for there to be genuine change, we need there to be a will either from within or without for change to happen. If , as Steve Groves is claiming, there is no will for change from within, then the change must happen from without. It might start with Steve Webb but it may be picked up by sections of the pensions industry capable of making change stick.

We have seen unilateral innovation before. Legal & General at the outset of auto-enrolment, more or less created the 0.5% AMC which became the internal benchmark for workplace pensions. Vanguard in the US, pioneered the use of low cost trackers available to everyone without the need for intermediation. Retirement Line continue to reshape the distribution of annuities in the UK just as Pension Bee are redefining the customer experience of a SIPP. All of these are examples of best practice, driving up VFM from within.

But so long as bad practice remains , we will need regulation to protect us from it. Much of the success of Auto-Enrolment was that it saw its scandals coming and rid us of them before they brought AE into disrepute. So, employers  that bought cheap AMCs at the expense of expensive AMCs once employees left (active member discounts), were called out and shamed- as were the insurers and advisers who devised this malpractice. Similarly, consultancy charging, which allowed advisers to levy fees on auto-enrolled savers for a service they didn’t need, was banned by law.

The policy intent that made Auto-Enrolment a success , must now be refocused on the drawdown of our savings. We need a firm pact between the DWP and the Treasury and HMRC to ensure that tax-payers money, spent on pensions is not syphoned off by the financial services industry to improve “NPV, RoE, RoC and DPP”.  We need this enforced by tPR and the FCA. Legislation and regulation will almost certainly be needed to ensure customers are treated fairly as right now, they are not.

Today we see the introduction of new laws requiring trustees to protect savers against self-harming scams. It is necessary to do this because people would rather trust scammers than advisers or trustees. The prevalence of scamming in pensions focusses on where the money is and where people are most vulnerable – at retirement.  The long-term solution to the scamming crisis is not with red and amber flag-throwing, but with better product, which people can understand because it transparently does what it says on the packet. But that will require innovation of the kind that Steve Groves despairs will not happen. There are others who are determined it will.

If not us-who?

Someone should invent a product that pays a lifetime income and allows for health status at outset, pooling the unmanageable individual risk into a predictable pool of risks. It could be called an Annuity and could come in fixed, inflation linked and investment variants 😝 pic.twitter.com/XkabrWVhqE

— Steve Groves (@Sjg3G) November 29, 2021

Let’s bring back pensions.