I spent yesterday morning with the OECD and some colleagues discussing the shift in pensions from a paradigm where employers stand behind promises with guarantees to the world we now live in , where our pension is of our making. It is a big shift and one that our current pensions minister considers one that is unfair on those relying on DC pensions.
Thanks to David Harris and Tor Financial for setting this up.
With me were people who think deeply about other ways of providing pensions than through purchasing guaranteed annuities or managing pension drawdown. The key issues of ensuring our income lasts as long as we do, protecting our income against the long-term ravages of inflation while ensuring we have enough to live on today, are fuelling a burning platform of debate among people in and approaching what they consider “retirement”.
The OECD showed us how other countries are dealing with this problem including Sweden, the USA, Canada, Germany , Japan and the Netherlands. What is clearly a global trend is towards risk sharing not risk taking. You can read all about this in chapter 5 of the OECD’s excellent Pensions Outlook 2022
Our discussions touched on retirement and the OECD accepted that for all the talk of the death of retirement, most people still consider there is a point when they will have earned enough to stop working and start relying on their pensions. The obligation of an employer is no longer legal but moral , employers will do what they can to ease the transition when the time comes but that no longer means paying the pension (via a trust).
Instead, the employer is looking to signpost a place where employees can safely translate their pension pot(s) into income with the job done for them by experts who will ensure a reasonable income today, protection against inflation and the management of the risks of living too long.
The way we organise how this can be done can vary. We had people in the room and on a Teams call representing insurers, annuity providers and even an occupational pension scheme keen to pay non guaranteed pensions out of pots transferred to it.
The Government is planning a new CDC consultation where they are considering master trusts as the means of paying these new non-guaranteed pensions. They may want to consider replicating the whole of life plan offered by Royal Mail or they may want to offer a new investment pathway which offers most people a better alternative to a guaranteed annuity. Either way, the non-guaranteed is going to have to become part of the furniture (rather than a one-off as Royal Mail’s scheme seems to be).
The OECD don’t like the term CDC as it makes us think of the Royal Mail model to the exclusion of the other solutions we were looking at yesterday. What all of these solutions have in common is that they ask savers to share their risks with other savers with the help of an organising agent – the provider of the non-guaranteed pension.
This can only happen with the support of Government, we heard of other countries where Governments have removed obstacles to this happening (Australia) and actively promoted this happening with tax incentives (Canada). It would be fair to say that in no country round the world where risk sharing is becoming part of the furniture , has it become the default way of doing things. Indeed in the Netherlands, where they got the risk-sharing wrong first time around, they’ve had to take a step away from collective provision (now offering only a mortality pooling umbrella for individual drawdowns.
The UK Government is clearly committed to getting this right and is taking things at its own pace, but we need to see that pace increase if it is to meet the increasing demand of those like myself who come to the end of a career saving into a workplace pension to find we have a pot and no pension.
We were told we would not have to buy an annuity again, but 9 years on, we might hope for something a little bit easier than managing the nastiest hardest problem in finance – ourselves.
CDC and similar schemes are never going to take off when we have a Regulator gold-plating the regulation – as we saw with that written to accommodate Royal Mail.
The more, as a pensioner, I think about pensions provision (and read in certain types of news media about how the State Pension cannot be afforded) the more I realise how the workers have been “conned” about pensions over recent years. A DB pensions provision largely gives the pensioner certainty over the financial side of life in retirement, in a way that DC doesn’t and cannot! And yet we’ve all being conned into believing that DC is SOOooo much better for us! NO, it isn’t. It is better for your employer because your emloyer now has no need to concern itself over your pensions provision. Once you leave their employment, your employer’s liability has gone. OK so if you have failed to use up most/all of your pensions pot by the time you die you can will it to a relative or a charity. But if you live beyond your pensions pot, you are going to become largely destitute and possibly dependant on that same relative! And when you think about it, it isn’t even to your emloyers advantage. Because if you die before the age the scheme funding is based on, your “pot” remains as part of the funding of the scheme, so helping to reduce the risk of the fund becoming underfunded which is to the employers advantage. It therefore seems to me that DC is “con trick” on both the employee and the employer. Was it thought up by the people who thought LDI was a good idea by any chance?