Retirement savings need a vaccine that can reduce the wastage from savers making ill-informed decisions when cashing out their pension pots.
I am genuinely excited about the opportunity presented to the operators and fiduciaries of workplace and non-workplace retirement savings platforms to convert pots into pensions using pooled funds. It is pensions “vaccine moment” – here’s why.
At yesterday’s Pension Playpen coffee morning, Mark Johnson of Just Retirement, explained how pooled longevity funds could be deployed in the UK within months, the only dependency being market demand
This may not sound very exciting to ordinary savers so let me explain just what this might mean to you and me.
- People could exchange their pension savings pot for a pot that paid them an income that paid them an income for the rest of their life.
- That income would likely be 35% higher than the income they could get from an annuity
- The income would not be guaranteed but would rise and fall depending on investment returns.
- The more purchasers were prepared to accept rises and falls, the higher the average rate (some risk-rating could be applied)
- Better rates could be available for those with lower life expectancy
- People can sell out of the fund and use a different strategy in future
What such a fund would means to those running retirement savings platforms (master trusts, GPPs, SIPPs , Stakeholder Pensions)
- Opportunities for bespoke products with benefit design and investment strategies tailored to a fiduciary or provider specification (indexation, spouse’s benefits etc)
- A charge on the fund meaning the management of pensioners affairs could be financed from the fund
- A means of keeping pensioners on the retirement savings platform
- Administration of longevity pooling , record keeping, optional smoothing and rate management outsourced to specialists with annuity experience.
- Funds operating as permitted links for compliance purposes
- Funds could operate using discretionary (with-profits tyle smoothing or algorithmic smoothing – or no smoothing at all.
- Clear pricing at entry, transparent disclosure when rates altered (similar to mortgage rates)
- Opportunities to take advantage of new permitted link relaxations on private markets (important as long-term investment performance is key consideration for pricing
- Funds create no solvency issues for insurers so can be heavily invested in growth assets
- Funds ready to be constructed and could be deployed independently of the CDC code.
- Funds can be positioned as a default option if stronger guidance rules are enacted.
What such funds could mean to insurers
- Redeployment of existing skills in a unit linked product
- Nothing to go on the Solvency balance-sheet
- Falls within existing insurance legislation
- Works on relatively small pools of lives (<500 to begin with)
- Existing market with clear needs – bulk distribution through workplace and non workplace platforms
- Works equally well for contract based and trust based schemes.
- Capable of being positioned as a default option (with a little help from regulators)
In another blog today, I explain that one of the confusions about pensions is that-retirement pots do not pay an income for life.
Now they can. What is stopping nimble and forward thinking retirement savings organisations such as the 15 who’ve just signed up for the Thunderclap effect from turning pots into pensions by the end of the year?
A way forward for UK pension policy
I see this approach as a major win for pension policy and will be discussing how it can be promoted and integrated into existing platform propositions with the DWP later this month.
I would be interested to hear from any organisation interested in these discussions. It would be good go get momentum behind this.