As DC retirement savings plans mature they present those who save, those who look after their savings and regulators with the same challenge- “how to turn pots to pensions”.
The way in which different countries save for retirement is pretty consistent, most people use a payroll savings facility and invest in funds designed to maximise money at retirement available for the purchase of some kind of income stream. Frankly the same kind of process is in place for all the major economies.
Where consistency ends, is in what we are supposed to do with our accumulated pot when we stop working. We have seen moves towards collective drawdown in Australia, with Q Super and Challenger, here the buzz-phrase is collective annuitisation where large pools self-insure longevity risk as happens in DB plans.
In the UK and many other economies, the buzzwords are “freedom” and “choice”, with the onus being put on individuals to choose their investment pathway which can vary from a formal annuity to simply passing the pot on to the next generation. However, there is concern in the UK that while this is working for the mass affluent who have the money to pay for advice or the competence to DIY their retirement, it is not working for the bulk of the population who are struggling.
In this blog, I am looking at what is happening in the USA and how the investment behemoths, BlackRock and State Street are looking to build on their existing strategies to provide solutions to the mass market.
This blog asks whether the concept of a wage for life is really on offer from these financial behemoths and whether they will travel to the UK.
A populist pension….
You can tell that BlackRock have decided for populism by the way they introduce their new variant on the successful LifePath product.
The key messages are targeted at concerned fiduciaries (employers) who are looking to do their best for their “plan participants”. This is BlackRock taking charge. While participants have the option to customize how they get paid, the “investment solution” relies on BlackRock to pay them and minimizes fees from third parties. This is a power-play from a financial behemoth taking control away from advisers and other third parties.
Lifestyling to 60
In terms of pre-retirement planning, it’s the same old – a gradual shift to bonds from 55 with the transitions happening within a target dated fund (a lot more efficient than letting your platform administrator do it).
Transitioning to LifePath Paycheck.
Beginning at age 59½, participants of an eligible retirement plan will have the option to redeem their investment in LifePath Paycheck and withdraw a portion of their retirement plan savings – in an amount that would be approximately 30% of their LifePath Paycheck investment at age 65 – and purchase annuities from insurers selected by BlackRock. These annuities will provide a paycheck for life.
Note, no advice, no open market option and the annuity income is paid by BlackRock’s chosen insurers (expected to be Brighthouse Financial and Equitable). So the Paycheck will come from a different source than any income drawn-down and could result in unconsolidated payments dripped into your account (hardly a Paycheck)
What happens to non- annuitized monies?
Not quite as simple as first thought.
I can see this kind of plan appealing to affluent Americans with a proper understanding of the risks of being in cash, equities, bonds and of investing in insurance annuities. Of course those risks change over time and cannot be understood “ex ante” (before the event).
What the product is doing is putting BlackRock at the heart of the retirement process which may be what a plan sponsor wants – nobody got sued for recommending IBM.
But once you’ve considered the pros of outsourcing the management of the nastiest , hardest problem in finance to the biggest asset manager in the world, can you really say you’ve solved your participant’s problem.
Not much like a paycheck!
I shouldn’t think that this solution is going to play that well in the rust-belt of the deep south, it looks a solution by the wealthy for the wealthy, so the populist message in the title, takes us only so far.
Compared to the inclusivity of Q Super or Challenger, this is an unambitious offering. I imagine there are good reasons for that. 401k has never aspired to be inclusive, it has worked on a system of enlightened paternalism where participation is encouraged because high participation rates mean high tax breaks for the senior managers of sponsors.
More than 57m US employees, close to half of the nation’s private sector workforce, do not have access to a workplace retirement savings plan. By contrast ,close to 100% of working Australians participate in Super and auto-enrolment in the UK and New Zealand is proving that given a decent nudge, pension inclusion rates among eligible employees can be above 90%.
America does not offer workplace pensions to all, 401k is mainly for the mass affluent and the complex system of Federal and State law makes it unlikely that collective solutions on a Pan- American basis will catch on. The BlackRock LifePath Paycheck solution looks fit for the limited purpose of 401k but will it travel?
Would the US system translate to the UK?
Some commentators are already arguing that BlackRock’s pseudo workplace solution is right for the UK.
But I think it highly unlikely that the features of LifePath Paycheck would prove attractive to UK plan sponsors. BlackRock’s Lifepath TDFs are popular in the UK (and form the default for most Aegon workplace pensions).
But though BlackRock claims that LifePath helps members spend in retirement as well as save during their careers, there is no longevity protection in the UK version.
Would people consider a series of payments from annuities and withdrawls from a TDF akin to a workplace paycheck? I doubt it. Does that invalidate TDF’s as a valid means of accumulation? No. Does the TDF concept help people spend their savings? Potentially yes.
TDFs do have a feature that actuaries love, they create cohorts of savers whose saving strategies mature at certain dates (I am in a 2030 TDF strategy, meaning I’ve determined my Nest Savings will be ripe for spending when I’m 68). I’m sure there are hundreds of thousands in my cohort as Nest has nearly 10m savers.
Rather than offer cohorts emerging from each cohort a complicated set of decisions on how to turn pots to annuities, BlackRock, Nest, Vanguard, Fidelity and others using TDFs could consider offering a collective way of spending – along Australian lines, where insurance is exchanged for self-annuitisation.
Cohorts of savers could self – annuitise within the cohort (where cohorts were of sufficient numbers) . This could make each TDF a self-annuitizing scheme which could create immediate scale (assuming savers needed to opt out), subsequent cohort could join the scheme to ensure it did not become a tontine but an evolving decumulation CDC.
This idea looks unlikely to work in the USA, where individualism is something of a financial creed, but it looks much more likely to work in the UK.
I am a fan of BlackRock’s LifePath as it provides good VFM in terms of saver’s outcomes. But I don’t see LifePath PayCheck as quite the popular solution in the UK , that BlackRock can expect in the USA. It doesn’t look like travelling to the UK in the form being designed for 401K, but BlackRock , State Street, Vanguard and Fidelity should not give up on the LifePath PayCheck as a means to create collective self-annuitizing pools paying “plan” pensions as a “wage in retirement”.