Around the turn of the century I wrote my first Government pension consultation response., it was for Eagle Star and was supposed to have been signed off by someone in policy.

It wasn’t and it went to Government including the phrase “personal pensions aspire to the efficiency of Serps“.

I remember this as Barbara Castle picked up on it and quoted Eagle Star in the House of Lords as advocating what was to become the second state pension as the best way to put extra income in the hands of the poorest pensioners. Her quote was  picked up by our press office and I was asked to explain myself. It did not further my career, especially as my colleagues at Allied Dunbar had very different views.

Nearly a quarter of a century on, Serps and S2P are consolidated into a single state pension and the original conception of stakeholder pensions (master trusts) have finally taken over from personal pensions as the alternative to a defined benefit pension (whether purchased as an annuity or funded by a sponsor). But rather than progressing, it seems to me that the provision of extra income for the low income pensioner has gone backwards.

Pension credit is an overly complicated means tested benefit that has low take up and is costly to administer. The extra state pension from Serps, which was increasingly targeted at the low income pensioner, has been replaced with a capital reservoir from which “savers” can draw as they see fit.

But as I mentioned in yesterday’s post “the curse of drawdown”, people do not find the process of drawing down very easy. They know that drawing money out of a fund that is in sharp decline is as dangerous as catching a falling knife. So their natural inclination when the markets fall is to stop the drawdown- of risk “pounds cost ravaging” of their pot.

Financial advisers typically suggest that drawdowns through periods of excessive volatility are made from cash and not from funds and pensioners with money in the bank as well as in their pension pot may cope with the current spike in demand from their household bills out of slush funds.

The graph shows the likely response from employers over the next few months and years to the spike in inflation we are seeing. Pensioners are not getting anything like the anticipated 6% rise in earnings (they are getting the miserable state pension increase and up to 5% if they are in a defined benefit pension scheme. But people who have pots rather than pensions are going to have to manage matters for themselves, there was no cash flow plan that anticipated the surge in costs they are experiencing today.

Where there is no slush fund –  where demands on income cannot be met from pensions in payment or from money in the bank, then the pension pot becomes the slush fund and panic selling of units can lead to a run on the pot. I will be looking very closely at the impact of the spike in inflation (and the longer term impact on consumers of increasing interest rates) – on pension savings. The FCA’s Retirement Income Study for the next 18 months will show whether my fears are groundless or realised.

In an article in today’s FT, John Plender argues that the last place you want to be right now is in defensive strategies such as cash or gilts. But this is where money from drawdown is heading.

Inflation: managing the threat to your pension https://t.co/H3IRtwPdK7

— Josephine Cumbo (@JosephineCumbo) May 14, 2022

I am not hopeful. I anticipate that we are heading into a sustained period of economic bad news that will feed through into financial stress for a large part of the population. The temptation to “de-risk” to cash is a strong one – I am not hopeful – I fear a run on pots.

The efficiency of  pension schemes

It is at times like this that those with secure pensions – those arising from the payment of national insurance or service in pensionable employment that gave a defined benefit, becomes clear.

Instead of leaving members to it – which is what DC master trusts and workplace GPPs are doing, the defined benefit pension scheme continues to pay out a pension, which though generally capped in its increases at 5% is still able to help pay the bills and put a little extra in the pocket.

These collective schemes, for all their faults, are fundamentally an insurance. They were designed to do the things we individually find it hard to do, to carry on paying ourselves a replacement wage in retirement from a collective fund.

This can be done because of the cash flow planning done within a large scheme that ensures that the scheme remains properly funded at times like this. Serps/S2P used the covenant of general taxation, other covenants may not be so strong, but thanks to the PPF, we now have a safety net so that we can think of our DB pension as “safe”.

I have been very much struck by the happiness such schemes have brought, as I travelled around the Basque region these past few days. Here senior people- mostly over 70, were enjoying the longest holiday of their lives without fear and almost everyone I spoke to had what they considered a good pension (the exception was someone who had made it big by selling her own company).

This is how it should be

We should look forward to our older lives.

Getting back to pensions as an insurance.

People, having worked for upwards of forty years are entitled to look forward to a rosy future, not a future of uncertainty and worry. The system put in place by Barbara Castle in the 1970 was designed to ensure a reasonable earnings related pension paid on top of a flat rate pension for all.

Despite the success we have had with getting those on low-incomes saving into pots, we have not found a way to efficiently turn small pots into pensions that pay income efficiently throughout later life. So most people have now a much less certain future than the one Barbara Castle had in mind nearly fifty years ago.

The point I am making on this blog, is that we cannot allow pensions to be the privilege of the few but they must be the right of the many. We cannot rewrite the pension system along Barbara Castle’s lines, but we can do more to insure people against living too long and against the impact of the markets and their own irrational behavior.

We desperately need a better way to turn pots into pensions.