Tomorrow (Tuesday 15th) I will be talking with Simon Eagle of Willis Towers Watson on what a new pension based on CDC principles but open to anyone with a DC pot that can be drawn down.
Why this urgency?
I reckon we have now reached a stage where this new type of pension product can be constructed and delivered to the pension market within the next two years.
That would make it available to the first public users of the pensions dashboard in 2025. It would be a notable achievement for this Government but achievable as I believe this pension is deliverable without the need for further legislation, all that is needed is for tPR and FCA to recognise its use as a standalone in retirement pathway (the pension pathway) and as the default retirement option for any workplace pension which wishes to adopt it.
The major difference between the conception of what I have referred to as “retail CDC” , “decumulation only CDC” and the “pension pathway” is that it is funded and maintained by the steady flow of people with pension pots who want pensions. Research from Aon in 2018 showed that when asked what people wanted in retirement 62% of respondents described an annuity, when asked whether they would buy an annuity less than 10% said they would.
The demand is for a product that is done for us, lasts as long as we do and is more affordable than an annuity. In short, people will consider a trade of security for affordability. We have seen this trade off in the past when low-cost endowments took over from non-profit endowments, we are seeing this debate happening between superfunds and insurers over the long-term management of DB liabilities.
In macro terms, the argument is whether people can be allowed to choose an annuity like solution which is self-insured by the membership and run as an open ended fund rather than a scheme. The creation of the legislation for CDC schemes by DWP and the subsequent regulations from TPR show that this Government is confident that this can happen for employer sponsored schemes , the development of this concept into UCIT structures which are open to anyone with a UK recognised pension pot, does not require this legislation , but builds on the intent of the legislation which is to enable people with a pension pot to convert to a non-insured, non-guaranteed pension – a CDC.
The market impact
The creation of such a product would change the dynamics of the non-advised drawdown market and the large number of pension savers who are technically able to draw their pension but have yet to start doing so.
We know that non-advised drawdown is an area of the market that is causing the regulators concern, drawdown rates look unsustainable , many people are paying unnecessary tax, charges are often high , value for money poor. This is a market that needs disruption.
We also know that a very large amount of the money in pension pots and owned by people over 55 is simply rolling up and not providing any source of income. Some of this money may be following a pathway towards inheritance with the money destined for the next of kin. Some of the money is rolling up but is likely to be spent at some point in the future and some of the money is either lost or waiting for the right nudge – before conversion to a pension.
The intention of developing this product is to disrupt non-advised drawdown and the “lost and waiting” and re-purpose that money for pensions. This is the intention of the Australian Government’s retirement income review and of the Canadian Government’s relaxation of regulation for precisely this kind of product
I am pleased to see that Bonnie’s conversation with Stefan Lundberg is now available on youtube and can be accessed at the bottom of this blog.
The rising tide of pressure for change
You will not get people marching on the streets demanding changes to their retirement options from their pension savings. People know what they want but they are not going to get involved in delivering it, they expect things to be done for them. But in the absence of something better than DIY drawdown or annuity, those who want a pension will become more dissatisfied and that dissatisfaction will grow as people become more engaged with their saving as pension dashboards arrive.
Politicians are frustrated with the current state of affairs, the DWP are promising us yet another consultation on this but what is needed is the delivery of a product that makes the complex choices easy.
Willis Towers Watson appear to have accepted the challenge to meet the demand and dispel the dissatisfaction. I am pleased they are turning their formidable powers to this challenge.
Simon Eagle is leading the project and I very much look forward to discussing with him how we could deliver to the needs of the British public in a timely way.