‘retiring together

This week, Australia took a significant step towards a more mature retirement income system with the passing of the Retirement Income Covenant legislation. The Covenant requires superannuation trustees to reassess traditional retirement products and investment strategies and to enact retirement solutions (strategies) that are appropriate for a range of retiree types. The strategies must help retirees balance three primary objectives:

(i) maximising expected retirement income;
(ii) manage risks to the sustainability & stability of that income; and
(iii) Have some flexible access to savings during retirement.

Or as its Government says in its consultation response last September

The retirement income covenant will support retirees to have the confidence to spend their hard-earned savings, while enabling choice and competition in the retirement phase of superannuation.

The draft legislation would codify the obligation for superannuation trustees to have a retirement income strategy that outlines how they plan to assist their members in retirement. The strategy must consider how the trustee will assist their members to balance maximising their retirement income, managing risks, and have some flexible access to savings.

This is quite unlike the obligation on the trustees of UK DC plans who appear to have no obligation to members to find them anything but a transfer value to their bank or another pension plan.

It was easy to believe Steve Webb in 2015 when he “pivoted” from being an advocate of a pot purchases annuity system to a “nobody will ever have to buy an annuity” again system in April 2014.

Saul had become Paul in a blinding flash.

and like Paul, all that had come before was replaced by the overwhelming revelation that we had a new covenant. The question remains – who is that covenant between?

Steve didn’t have long after the enactment of the freedoms to ponder that question and since he left post , no pension minister has attempted to answer the question about who is responsible for ensuring that pots turn to pensions.

There are various candidates. Osborne’s original announcement included the promise that everyone who exercised freedom would get advice

“We’re going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution [DC] pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have….

“I am providing £20m over the next two years to work with consumer groups and industry to develop this new right to advice.”

Paul Lewis , in a recent Money Marketing article , charts how that guarantee has been watered down to what amounts to a nudge to guidance. He calls it getting “snarky”, with reference to the Baker in Carroll’s poem who tried to catch the Snark with a “wink”.

The Snark vanishes away , turning out to be quite different (a Boojum) than what all had expected. I suppose Paul’s point is that pension freedom is equally ephemeral and not to be determined by Bankers, Bakers or Beavers!

By likening Government policy to a nonsense poem, he highlights the pitiful paucity of options open to people trying to turn pot to pension 8 years since the Snark was let loose.

I was in a meeting with Interactive Investor yesterday, with – among others Rebecca O’Connor. I was earnestly discussing how we could put a value on investment pathways when Rebecca reminded me that a total of 19 people out of 10,000 retirees, chose an II investment pathway. It was a moment that Lewis Carroll and Paul Lewis, would have enjoyed!

The FCA, in its loftiness, assumed that if you built investment pathways , people would come. It’s been a year but they haven’t. To use Rebecca’s memorable phrase, “the only path people follow is their own”.  The Pension Regulator has not opined on the signposting of pathways by trustees , preferring its fiduciaries to come to their own conclusions as to how to “encourage retirees to maximize their retirement income”.

Understandably, the trustees put in place by employers have asked the employers and the employers have told them that the financial fate of retired employees is none of their business (knowing full well the consequence of making it their business). These trustees have sadly shaken their heads and waited further development.

Their trade body- the PLSA  decided in 2019 not to support the FCA’s initiative

 “However, we do not believe that the FCA’s investment pathways are an appropriate solution for occupational pensions – they are a solution to a specific issue in the contract based sector. There are differing drivers, protections and benefits for savers in trust based schemes.

Since then. it has made a half-hearted attempt to replicate the investment pathways with an initiative called “guided retirement income choices” – which might as well have been the investment pathways. So much for “differing drivers”, when it comes to hunting the Snark, we are all in the same boat

In its response to the WPSC’s inquiry to pension freedoms, the PLSA called for a new statutory obligation on pension schemes, “designed according to appropriate governance standards”, that would require them to provide “helpful guidance and signposting to suitable products”.

Which brings us back to the Australian Government  , which has done just that. And Australia’s pension industry has done more than that. Australia’s superannuation funds have started signposting collective schemes which provide wage for life solutions with self-annuitisation. Q-Super and Challenger have both now put such arrangements in place. These look less like an investment pathway as a default retirement solution for those who do not want to go their own way, but go the way of others.

I had hoped that Royal Mail’s CDC scheme would open the door on innovation, but it has not done that, it has only opened the door for large employers who may use CDC as a means of sorting out industrial disputes (don’t mention USS). It might even become a way for the 91 LGPS Pension funds and quasi governmental schemes such as Railpen to release themselves from onerous guarantees. But CDC is not going to be a legislated retail product for some years if ever.

Q-Super and Challenger did not wait for Government to tell them what to do. They took the initiative and did what they saw fit for their members. They provide solutions that are about

(i) maximising expected retirement income;
(ii) managing risks to the sustainability & stability of that income; and
(iii) having some flexible access to savings during retirement.

Here is how it works.

I’m not quite sure what is stopping a UK trustee from doing what Q-Super has done and I’m quite sure I could create a business case for master trust or pension super fund to do set up a “Lifetime Pension” option for its members.

Does the UK pension industry have to wait to told to do this by the DWP? I think the FCA’s retirement income study tells us conclusively that we are in a disorderly market where people go their own way in retirement , typically without advice or even guidance. The pitiful first year’s take-up of investment pathways  suggests that people are not going to be nudged into conformity. People need a strong default option in retirement, which is what those in Australian Supers like Challenger and Q-Super are getting.

Let’s hope that we can hunt down that