Is the “Flex first – Fix later” a retirement income product (or just an idea)?

I chaired Phil Boyle’s presentation at the Pension PlayPen coffee morning on Tuesday (19th Sept). It was memorable, mainly for Phil’s measured and good humoured explanation, but for a sense among those asking questions, that we might be seeing the germ of an idea that could become a retirement income product. Indeed , the other half of LCP’s ideas team, Steve Webb, was having a product discussion as the meeting happened with Retirement Line’s Mark Ormston.

The idea of buying an annuity in later life is not as unfashionable as it was a year ago

But while annuities move in and out of fashion on their headline rates, their underlining “utility” remains constant, they are currently the only way the elderly can ensure that their money doesn’t run out before they do.

This was where the LCP research began, looking at the kind of outcome actuaries dream of from DC saving where a saver has £1m in their pot and can afford to ignore the state pension. The conclusion that Phil (and Steve) came to is that from around 67, this lucky person would be getting more pleasure from a limited but defined income from an annuity than from the ill-defined but potentially larger income from drawdown.

Phil was happy, Steve was not

FORO – and how we measure it.

The problem is that as we get older, so the importance of us outliving our life expectancy increases. My Mum  sits on the extreme right hand bar, statistics says she’s got three or four years left to live but we’re rooting for her to be the one in ten who makes it close to 100.

The grey line should (to an actuary) be less jagged (another few thousand simulations would make it so), but let’s suppose it provides a consistent picture, it tells us that as we get older , the chance of living longer than expected gets more and more important. So does the fear that our money may run out on us.

Flick through the slides to find modelling based on different approaches to insuring against this fear of money running out before we do (FORO)

This is the big idea! But is it a product?

Put simply, the product behind this idea is either a deferred annuity bought at outset that materialises at some specified point in the future and is purchased by the remaining drawdown (which is true set and go), or it is an instruction made to a third party to buy an annuity with the remainder of the drawdown product at a specified age.

Smart people spot a couple of problems with either product. Product 1 depends on their being a market for deferred annuities at outset (today) and the retiree risks the drawdown not working too well and running out before the deferred annuity cuts in. Product 2 risks the price of the annuity at the determined age being too high for the remaining money in the drawdown pot and the residual income not meeting expectation (or even need).

The crude attempts to hedge against the volatility of annuity rates has left a large number of people in lifestyle strategies, pretty furious.

It’s worth noting that the average long dated gilt fund fell a further 5% yesterday, following the mini-budget.

People don’t take kindly to products that lose them 30% of their capital in exchange for providing certainty on the annuity income purchased.

But likewise, they don’t like being told that the income that they will get when they reach an appointed age (when pot becomes annuity) depends on the state of the stock market.

This is why the deferred annuity product has attraction but as John Quinlivan observed in the chat that went on as Phil presented

“Solvency II reserving for later life deferred annuities results in roughly 50p in the £1 being solvency capital + buffer for one bought at 60 and starting around 80”

You end up with a crap annuity and a depleted income till you buy one.

I remain unconvinced that people are going to buy into either a deferred annuity or a flex now- fix later product. Neither give the promise of a smooth financial ride into the later stage of life.

I do however think that the “idea” is a good one. I suspect that CDC either as a discretionary product (with-profit like) or rules based (a block chain model) could reduce the uncertainty though it would bring different risks.

The risks of CDC are that it operates outside the solvency II framework and is self-insuring. It is a mutual model that does not rely on the backing of a bank or insurance company and has its roots in the self-insurance of occupational pension schemes and other mutual enterprises.

This radical approach to insuring against living too long, is perhaps too difficult for financial economists, but is relatively easy for ordinary people to grasp. Whether we can ever create a retirement product which depends on “us” (the savers and spenders) rather than “them”, the providers of external capital, remains to be seen.

Thanks to Phil (and Steve and Mark) for all the work you are doing here. If I cannot have a CDC retirement product , I might settle for this!



What the audience said on Tuesday

Below are a selection of comments from the audience, salvaged from chat by Alan Chaplin (thank you).  I have drawn on some in my commentary.

John Quinlivan
Phil, one of the most important things you are bringing out here is that we use Present Value economics to assess issues, whereas we need value and age based present utility value functions

John Mather 
The fundamental issue is how with a given resource can you increase the amount of discretionary income to allocate to either current or future costs. I have found that changing jurisdiction has the greatest influence. In a recent case fixed costs were halved which gave all the tolerance to move your cross over point beyond age 75

Chintan Gandhi 
It’s a common misconception that CDC is like with profits. Key thing is that while the assets are pooled to provide an income for life in retirement, CDC allows benefits to be cut, which may be required in extreme circumstances. CDC will also benefit from:
(1) Greater transparency (all decisions including on annual indexation will be in the public domain)
(2) TPR / regulatory oversight – initial authorisation requirements and ongoing supervision
(3) Stronger communications to ensure people understand the nature of their pension including the risk the pension could be cut.

John Quinlivan
Solvency II reserving for later life deferred annuities results in roughly 50p in the £1 being solvency capital + buffer for one bought at 60 and starting around 80

Martin Tingle 
I thought it was possible to buy a phased drawdown now? Maybe Phil is saying that each annuity in that product is bought separately, whereas the product he proposes would commit up front and therefore benefit from the earlier commitment?

John Mather 
At what fund size does the happiness index change to a misery index?

Martin Tingle 
Ah, 76. Nearly our old system of being ‘forced’ to buy an annuity at 75!

Billy Burrows 
I said the optimum time an annuity was 65 but that was before pension freedoms and low interest rates – today i think the optimum age is about 70 / 75

John Quinlivan
It is an interesting question as to whether an insurer will price two cases differently at 80, where one is someone who at age 60 decided to buy an annuity at 80 vs someone who decides at age 80 to buy an annuity.

Henry Tapper
Billy, you sound like the man who backs every horse in the Grand National !

Russell Wright | Redington

But in your 80s you might not have £100,000 left in your pension pot to buy that annuity.

Henry Tapper
“mortality risk – will always win in the end”- Fear of Running Out (FORO)

Billy Burrows

Something else to take into consideration is inflation. At earlier ages it may be better to hedge against inflation by investing in real assets (drawdown) and level annuities don’t keep pace with inflation but in later life level annuities make more sense

Chris Radford

Is the reality not this?
Drawdown and its risks is a luxury that can be afforded if your pot is more than you need. But if your pot is only what you need or less then the decision is much harder and the annuity guarantee becomes overwhelmingly attractive.

Something else to take into consideration i… by Billy Burrows (Guest)
Billy Burrows
Something else to take into consideration is inflation. At earlier ages it may be better to hedge against inflation by investing in real assets (drawdown) and level annuities don’t keep pace with inflation but in later life level annuities make more sense

Chris Radford
Billy’s inflation point is very current and very true. Keeping funds in assets seems important vs securing an annuity that is guaranteed to decline with inflation. Thank you Billy

Chris Radford 
Pooling annuity purchases sounds very interesting and especially beneficial for people with smaller pots

John Mather 
should you consider applying the tax free cash to a PLA to get a better tax treatment?

Henry, To your question of will there be advisers around to “fix” and is it a “fee fest”
Until the next market correction, the number of advisers in the 5-50 adviser firms will probably increase according to trends issued by the FCA There are around 27,500 advisers today for the 6%, we are told, who make use of these advisers.

You could increase that number if those giving “guidance” and funded by the tax payer get authorised to give advice.

The advisers working in a firm with fewer than 5 advisers will continue to struggle so they might join the Money and Pensions Service.

You could then set the fee at a means tested low figure and control costs.

The significant amount of energy wasted on asking questions with no answer could be nudged in the direction; of a measurable improvement in solutions.
For example set an objective such as ensuring a living wage beyond work starting at age 75

Fees in the market seem to go mainly to activities unrelated to outcomes Try using the “measure what matters” approach by John Doerr, it worked for the Gates Foundation and Google

Barry Mack 
What additional factors do you need to consider if you need a contingent spouse’s pension/ annuity?

Billy Burrows 
You cannot do this without advice – it is hard for people like me to do this because there are so many moving parts – the thought of non-advised product fills me with dread

Alan Chaplin
deferred annuities are available in the bulk market – is this as sponsors are prepared to pay the solvency II premium or are solvency II issues different between bulk and individual deferred annuities?

John Quinlivan
@Alan, yes the DA is being bought by Trustees not individuals

Chris Radford 
One of the solutions to “drag” from adviser fees is the require advisers to charge a fee in £ rather than a fee in %. Then consumers can pay for a service that they need and it is a cost. Rather than suffering an annual % drag on the funds.

Fees as a % is an unjustified drain on pensioner incomes

Upton, Mark 
What does this all look for women, as opposed to men?



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , . Bookmark the permalink.

2 Responses to Is the “Flex first – Fix later” a retirement income product (or just an idea)?

  1. Eugen N says:

    I think the increases in yield bring annuities back in as mainstream retirement income product. There is an increase hurdle now what we name the Critical Yield A.

    There is no need for CDC schemes anymore, which is a shame, as we would never know if they worked.

  2. John Mather says:

    We didn’t have to wait long for the market correction did we!!! Maybe when the BOE moves rates to 6% the index linked annuity with a 10 glee might have some merit

Leave a Reply