Do DC pension plans have a duty to help consumers spend their pots?

When I buy a bar of soap , I expect it to perform in a certain way and it does. It can be a good or a bad bar, but it will clean me. When I buy a pension (technically a “money purchase”), I get no promise of a pension, it will not behave in a certain way unless I select an “investment pathway” – which may or may not buy me a pension.

I know of no other consumer good that so fails to deliver on the promise it makes. We are now used to hearing that the decision on how to turn pot into pension is the “nastiest hardest problem in finance”, that’s because the risks we take when buying an annuity or setting up a drawdown program or investing in a rental property remain “our risks”, they are not shared risks. Stefan Lundberg , in another excellent blog, explains why none of the investment pathways take away the risk of not getting the decumulation decision right”.

He gives us the good news that we can go and buy an indexed linked annuity , but points out that in doing so, we are paying the insurance company to take away our risk at a price that most of us will find unacceptable. We can’t live on the state pension and the income from an index-linked annuity unless we have big bucks. The number is about £700,000 in retirement savings to concert a pot to annuity to meet the PLSA’s comfortable retirement living standard.

So the good news turns out to be bad news for most people – and even those who have £700,000 would be unhappy seeing that converting to an income of around £27,000 pa.

Stefan doesn’t go down the rabbit hole of cashing out your pension and living from your bank account or from rental income from property but he does point out that setting up a drawdown at a more acceptable level of income, leaves you with another kind of risk, you may get what you want now, but you may run out of money in your later years – which is not what a pension is about.

Stefan’s solution (well in this blog anyway) is to wing it – or “adapt”.

My short, but perhaps unsatisfactory, suggestion is to opt for robust solutions and deal with the extreme tail risks in the same way as we do with most large changes to our life – adapt.

Stefan is perhaps pointing to solutions beloved of academics and actuaries, that the value of a guaranteed pension increases with age , so buying an annuity at 80 makes sense, especially if you can “flex” your money’s muscles in the meantime.

This is the current “state of the art” solution that pension providers like to get behind. It means that they can hang on to the consumer’s money for another 25 years and then hope that new technology or upgraded consumer decision making will mean that individuals will buy their pensions on time.

Frankly , that is a fairy-tale ending that works if you modelling solutions in a university or actuarial practice, but does not cut it for the millions of people who will have got to a point in their life when they want their savings to take over , leaving them free to get up in the morning without worrying about going to work.

“Let them eat cake”, said Marie-Antoinette, when told that peasants were rioting over the price of bread. Give them “pension freedoms”, said George Osborne to the politicians in 2014. George Osborne failed in his duty to the consumer as the cake is no better than the bread.

Ten years later…

It will not be long till we “celebrate” ten years of pension freedoms , during which time very large numbers of people will have reached retirement , faced the nastiest , hardest problem in finance and had to determine whether to turn pot to pension or choose some other investment pathway. About 10% of people taking a decision, use some or all of their pot to buy an annuity, and I’m pleased to see that annuity brokers and insurers have seen sales increase since the recent improvement in rates.

However , that 10% does not include people who haven’t taken a decision and are waiting for something better to come along. Something that provides a pension but without the penal cost of the annuity, something that gives dignity in retirement with the reasonable expectation that the retirement income will keep pace with inflation most of the time.

I believe that master trusts, workplace GPPs and non-workplace SIPPs should have a default pension option that delivers a retirement income that keeps pace with inflation most of the time at a rate that gives greater dignity in retirement than an annuity.

Not only do I think they should have this option, I think it is the consumer duty of those who operate retirement savings schemes to make such an offer.

I am fed up with pussy-footing around on this. It just isn’t good enough getting people to save into “workplace and non-workplace pensions” where the only thing that makes them pensions is the tax-treatment of the “wrapper”.

People deserve more, they need Government to wake up to the word “pension” that appears in the DWP’s title, I will be saying this when the consultation on retirement income comes out and I am saying this to Stefan, who I am sure – sees sense in what I say.

However, the promise of his blog is as empty as the promise of a pension.

The number of people retiring on DC savings alone is growing and with that the need for decumulation solutions. But there are no clear cut solutions. In this blog we will explore why that is the case.

The reason why DC pension providers aren’t providing pensions is because they feel they don’t have to. But if you promise someone a pension, I say you have a consumer duty to provide one.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Do DC pension plans have a duty to help consumers spend their pots?

  1. BenefitJack says:

    You state: “… When I buy a pension (technically a “money purchase”), I get no promise of a pension, it will not behave in a certain way unless I select an “investment pathway” – which may or may not buy me a pension. I know of no other consumer good that so fails to deliver on the promise it makes.”

    In the states, when you contribute to a “money purchase” pension plan (or when your employer contributes), the normal form of benefit is in the form of a single life annuity (if you are not married) or a 50% Joint & Survivor annuity (if you are married on the date you commence payout).

    From the US Department of Labor:
    “If you are in a defined benefit or money purchase plan, the plan must offer you a benefit in the form of a life annuity, which means that you will receive equal, periodic payments, often as a monthly benefit, which will continue for the rest of your life.”

    Page 7:

    And, in most “money purchase” pension plans, the plan sponsor controls the investment of assets, and takes on the fiduciary responsibility.

    With respect to “money purchase pension plans”, as with individual account defined contribution plans (in the states, 401k, 403b, 457, IRA, etc.), they make NO promises regarding the level of retirement income BECAUSE they are, intentionally, NOT defined benefit pensions.

    In the states, nothing stops the employer from adopting a defined benefit pension plan with a final average pay or career average pay formula, where there is a promise of lifetime income.

    Your statement about “failing to deliver on the promise it makes” misses the point, badly. So, the money purchase plan will provide retirement income for life, but, if you want pension-like income from other individual account plans, you have to purchase an annuity, or select an investment that provides Guaranteed Income.

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