I was genuinely excited to attend the Pension Playpen interview with Edi Truell. As well as his work on Superfunds as a Buy Out vehicle for old final salary schemes, which is of only tangential interest to me, Edi also shared with us his idea for a Super-Haven for DC pots. And as many people know, the multiplication of DC pots and the poor offerings made to DC savers on retirement are issues that I’m passionate about.
Edi and I seemed to be in agreement that the current binary options at retirement for DC pots – annuity or drawdown – sit at opposite ends of the spectrum, leaving a huge gulf between them. The annuity is super-secure, guaranteed by the strong reserves of a life insurer and with the FSCS standing behind them should an unthinkable insurer collapse ever happen. But that security comes at a high cost in terms of reserving and restrictions on the backing investments. Meanwhile in the other corner of the ring sits drawdown, where you can invest in anything from gilts to car parking spaces as the fancy takes you, but you may run out of money. And unlike Faust, you can’t even be certain of 24 good years before disaster strikes.
I have experimented with combining annuity and drawdown – in the way that the late bon-viveur Robert Morley would answer “I’ll have a bit of both” to an either/or question. And that approach has some advantages, in that the certainty of the annuity bit enables a rather more adventurous and rewarding investment strategy to be followed in the drawdown bit.
And I enjoyed Steve Webb’s paper last year “Is there a right time to buy an annuity?” which blends the two options by starting retirement in drawdown and then flipping into annuity at the age that LCP’s clever modelling says is right for you. But that’s a cliff-edge decision and human behavioural studies abhor cliff edges.
Edi Truell’s idea is a spin-off from his main business which, once TPR complete their authorisation process, will be a Pension Superfund buy out facility for employers looking to shed old DB schemes off their balance sheet. The opportunity that Edi has spotted is that many of the members who are having their DB transferred into his shiny new vehicle will also have a DC pot. Perhaps they would like to transfer that too!
And in the same way that the Pension Superfund will outperform the traditional insurer buy out of DB liabilities, his DC Super-Haven will outperform annuities. Edi is achieving this outperformance through a combination of non-Solvency II reserving and a less constrained investment approach than insurers. In what struck me as a remarkable act of generosity, Pension Superfund will share the ensuing upside with its annuitants.
So, if you transfer your DC pot to a Super-Haven you will get a competitive annual income that is fixed. Plus the prospect of a 13th month bonus income instalment. Maybe like double pay in December, which would be a most welcome addition for a pensioner with a host of grandchildren to provide presents for!
There are clear similarities with Decumulation CDC here, which also seeks to sit in that middle ground of combining some comfort through predictability with some upside from a more flexible approach to asset/liability management.
Over the next 12 months Government will be deciding on maybe another two or three CDC models to take forward to legislation in addition to the trail blazing Royal Mail model. It’s going to be a very exciting time seeing those new models take shape.