I am using this post-Christmas hiatus to think about how we could create a Pension Pathway for our retirement savings. A Pension Pathway would pay us a reasonable wage in retirement without involving the need for financial advice.
Here are the key features of this Pension Pathway;
- It guarantees nothing but promises better value for our money than investment pathways
- It will pay an income that will last as long as we do
- It can be used by anyone with a pension pot or money from other sources (subject to HMRC limits)
- It is powered by an investment that promises long term growth through productive financing of responsible investments.
- Pensions are priced and administered by strictly observed rules set and maintained using blockchain technology for maximum security, fairness and effeciency
- It has low maintenance cost and doesn’t need a pension expert for support
- It is regulated using an existing authorisation framework and established as a CDC scheme.
- It is presnted to ordinary savers as a pension that will go up and down depending on investments and how long people live.
Guaranteeing nothing – promising better VFM
We must avoid guarantees that limit pay-outs in return for unwanted security. Pensions are best paid through a promise of best endeavours and purchased with the confidence of everyday people. The major master trusts are the obvious suppliers of pension pathways, whether backed by insurers , banks or by private equity, these organisations will generally manage pension pathways on a commercial basis (though they could be subsidised as an employer sponsored benefit).
The key measure that people should use in choosing a Pension Pathway is “value for money”. Comparisons should be between “leaving your pot to grow”, “cashing out” , “buying an annuity” or “using drawdown”. I do not propose that the Pension Pathway be used as a default for those with pension pots, but I see it as an obvious next step for those looking to pay themselves a wage for life. It could be introduced as such from pension dashboards and be promoted as a pension option by Pension Wise.
Paying an income for as long as we need it
We should feel good about living longer and know that there will be income to pay our bills till our final days. Worrying about money running out is no way to face the future and leads either to hoarding or reckless reliance on others (typically social security).
The pension pathway works on our experience of the “lifetime of the crowd” with average life expectancy used to establish the rate of payments. These rates are adjusted from time to time if experience changes and these adjustments will feed through into higher or lower payments. This is how the pension pathway manages the nastiest hardest problem in finance – individual longevity!
The administration of the scheme behind pension pathways incorporates the methodology established for modern tontines but Pension Pathways are not tontines and should not be promoted as such – they are pensions.
Available to anyone with retirement savings
The pension pathway is principally funded from workplace pension savings, though it can be topped up from non-pension savings using HMRC pension saving limits – these contributions should get the usual tax-reliefs.
When a contribution is received, it is exchanged for pension pounds (payable for life). The rate of exchange is determined by a published exchange rate which is calcualted on the age you want your pension pounds to begin payment. People can choose to have Pension Pounds paid from the minimum pension retirement age or later, they couldl be purchasable by people even if they’ve turned 100!
The exchange rate will be adjusted to take into account re-assessment of the lifetime of the crowd and the progress of the retirement fund into which people’s money is paid. This progress will take into account the cost of administering the pathway and the investment costs incurred. These will be disclosed and be managed within any charge caps applicable.
The intention of pension pathways is to provide pensions indefinitely. There is no reason why the pathway should end, it could extend for centuries. So investments should take advantage of long time horizons and not be focussed on short-term security or opportunistic trading. Pension Pathways should be a source of Patient Capital for projects that have long-term value both to investors and society.
This is what pension funds can and should do, sadly it is not what defined benefit schemes can do at present, as they need to provide short-term guarantees which means they have to invest in unproductive finance. The pension pathways promise better long term pensions because they are released from onerous guarantees. However , if people want to buy guarantees at any cost, they willl continue to do so using another pathway that leads to an annuity.
Rules based pricing and administration
Confidence in a pension that isn’t providing guaranteed payments, has to be based on a transparent system of pricing and administration which can be audited and regulated by experts and assessed by ordinary people.
Undoubtedly, pension pathways will be compared by differing rates of exchange and these will diverge from each other over time depending on changes in each crowd’s life expectancy , the performance of the investments and expenses taken from the fund.
This transparency can be achieved through the use of blockchain technology where gains and losses are immutably recorded according to pre-agreed rules. The blockchain has advantages over conventional databases in that it eliminates most manual intervention and the capacity for mistakes or fraud. Once set up, it is highly effecient , reducing time needed from auditors and regulators and providing the clarity that has been lacking in products such as with-profit annuities.
The tax-treatment of the income can either be totally taxable (where PCLS has been drawn) or as per UFPLS, where only 75% of each payment is taxable
The blockchain is also useful in administering the reallocation of pension credits to the surving crowd when one member dies.
The determination of remaining rights within the scheme needs to be clear to people. Rather than working on a system of pension credits (where rights are determined on the pension payable), rights could be determined on rights to a share of value in the fund. This could mean that people could take a transfer value from the fund, even if in payment. Technically, this could be called a “money-purchase underpin”.
Effeciency and utility
The majority of costs incurred in pension management relate to management time. The use of the blockchain should reduce the amount of manual administration and reduce time auditing and regulatoring pension pathways. But much greater gains can be achieved by reducing advisory time both at the point of sale and on an ongoing basis.
Pension Pathways are designed to pay pensions and not as a means to accumulate wealth or provide bequests and transfers to other products. So while Pension Pathways need to show their working, they need not trouble those who use them, who should be able to spending their retirements enjoying not being at work!
Regulation and authorisation
Pension Pathways should be variants of CDC schemes, designed to provide scheme pensions resulting from the best endeavours of those setting them up. They should sit comfortably in the existing regulatory framework of the Pensions Regulator though aspects of the schemes may be overseen by the FCA and PRA (for whom issues of competition with investment pathways will be important).
Pension Pathways would not then need to be subject to the capital requirements of annuities but nor should they be treated as wealth management. They provide an assurance that money will be paid till death as a pension and this makes them collective DC products. The Collective Money Purchase regulations will mean that such schemes will need to meet the requirements of at least the master trust assurance framework and probably additional assessment – as Superfunds are being assessed. However , unlike superfunds, Pension Pathways would not need the capital reserving of Superfunds as benefits provided can be varied.
The Pension Pathway can be presented as an alternative to investment pathways as a means to turn a pension pot into a retirement income that lasts as long as you do.
Pension Wise and Pension Dashboards should be able to explain Pension Pathways as a way for ordinary people to turn their pots into a pension,
Explaining to people that the pension isn’t guaranteed and that it is not an annuity should be carried out without apology and with energy. People who want guarantees for their pots could and should buy annuities.
The Pension Pathways should be presented as a new option for people who have so far held off taking decisions about how they spend their retirement money or have simply stripped out their Pension Cash Lump Sum and left the remaining money in the pot.
The Pension Pathway should be presented as a means for you to be paid a pension while your money works productively for the good of society and the planet.
The Pension Pathway should be promoted as transparent, secure and effecient in its administration and well audited and regulated.
Finally the Pension Pathway should be presented as a crowd-based product where economies of scale are achieved by people clubbing together to get a better deal than they can get on their own. The backing of an accepted pension brand such as an insurer or master trust will be helpful in this.
AgeWage and Pension Pathways.
A Pension Pathway is an AgeWage. It is a Wage in Later Age and it makes your money work as hard as you do (or did!).
I want AgeWage to play an active part in developing new products that others can take to market. I do not see AgeWage as a provider of Pension Pathways.
I do see AgeWage’s system of determining value for money as helpful in the comparison of investment pathways and I suspect this could be extended to help the general public compare Pension Pathways with existing options.
If you have read this article through and see sense in developing Pension Pathways, you might like to drop me a line at firstname.lastname@example.org . It may be that we can set up an advisory team who can look at each of the elements set out above and see if we can make the Pension Pathway the logical next step for CDC.