The Royal Society of Arts and Slaughter and May laid on a two hour discussion yesterday around the future of risk-sharing (aka CDC) in the UK. I found it enervating and dispiriting in equal measures.
It was good to actually be discussing how risk-sharing could help ordinary people (rather than employers, lawyers, actuaries and the fund management industry.
It was not so good to be discussing this with people who for the most part are involved in policy, rather than making the strategic decisions on where policy should be deployed.
My position on what should happen in the UK is on the table , I won’t bore on that. But I think it’s worth focussing on who has the problem that risk-sharing could fix
There are a lot of people in this country over 55 who have not cashed in their pension pots and are waiting for something better to come along than an annuity. They are the people who relished the freedom to spend their retirement savings as they chose but who would very much like to have someone do the tough job of converting pot to pension for them, better than an annuity can.
They do not include people who will prefer the guarantees of an annuity and are prepared to swap their savings for a guaranteed income for life.
They do not include those people who like to manage their own money and will (without advice) take out a SIPP and manage their pot their way.
It does not include the people who want to give their money to a financial adviser and have a lifelong relationship where their wealth is managed to their needs.
And it does not include the very substantial numbers of people who have spent most or all their careers in DB schemes and are now enjoying the benefits of earnings related pensions (including SERPS/S2P).
The current system is working for these people and they probably represent 30-40% of the people who are wanting to move from a reliance on work, to a reliance on pensions and savings, as they grow older.
The great need for a pensionator
I’ve just added “pensionator” to the words my spellcheck accepts, other than some motley on social media – a pensionator isn’t a thing – it isn’t a word but it is on this blog!
The dashboard is going to show up the need for a pensionator, a pensionator is way of turning disparate pots into pensions that make sense to people, pensions that pay out every month, go up -generally in line with the cost of living and have rules about what happens when you die, what happens if you change your mind and what happens when the markets screw up – that you can actually understand.
I mention the dashboard because the dashboard is going to help the people who don’t have advisers, don’t have a lifetime in DB and do have a mess of pension rights and pots. These people could have a pot that happened because they were told to contract out of Serps, they could have some savings in a stakeholder pension or a retirement annuity contract or an AVC and they will most certainly have had savings from retirement savings schemes they’ve been auto-enrolled into over the past 11 years.
These are people who don’t have enough to feel wealthy but more than enough to claim benefits. According to the FCA’s retirement income survey, they have a combined pot of around £60,000 and they need pensionation.
Pensionation is the way we turn pots to pensions
The great thing about yesterday’s meeting was that it was lead by Adrian Boulding whose pre-occupations were about the things that matter to ordinary people, I’ve listed them above.
The policy question was about whether a Government should mandate how a product works (standardised CDC) or whether it just relaxes the rules on how a pension can be paid so that pensionation can include the payment of non-guaranteed income either from an occupational pensions scheme or from a fund.
The commercial question is will enough people choose to pensionate their savings voluntarily or will there have to be a kind of auto-pensionation where people have to opt out of having their pot turned to pension.
I’m of the view that while smart people make smart decisions and find advisors or SIPPs or jobs with proper pensions, many of us make no decisions about pensions and find ourselves dazed and confused by the choices of investment pathways and end up cashing our pots out or doing nothing. Very few of us make a plan and stick to it, whether it’s gym membership or pension strategy, we start well and let things lapse. Which is why we get personal trainers and why we like the idea of getting our pensions done for us – pensionation.
There was a view -articulated by the Pension Regulator, that people in need of pensionation were solely those with small pots for whom a CDC solution would provide a little more income. This is not how I see those who need pensionation. The people who struggle with advice and annuities and combining their pots include people like me! I suspect that most of the people reading this paragraph could do with some pensionation.
And if we operate CDC as a way of turning pots to pension and if CDC is properly regulated and has the support of the Treasury and the DWP , the FCA and TPR then when people see all their pots and pensions on their pension dashboard, they will be able to see what is likely to happen to their money – what will be pensionated and what will be paid as cash, what pension has already been earned through state pension credits and service in Defined Benefit employment.
The core need for pensionation is of course amongst low and middle earners as the 30-40% of people who use an advisor or buy annuities tend to be the more affluent. Collective risk sharing (or solidarity as Damian Stancombe asks me to call it) will be happy to see their pots pensionated, so long as they can trust the organisation paying the pension.
But to make pensionation happen, we are going to have to fill rooms not with wonks like me, but the people who fund master trusts, run insurance companies and want to invest in the future of pensions (as NatWest have invested in Cushon). The people who will decide on whether we get the option of pensionation will need to see a clear plan of the rules from the DWP (I will return to the CDC consultation when I have strength). They will have to have assurances that auto-enrolment can extend to “decumulation” so that pensionation can become the default option. There will have to be clear rules, as there are in accumulation, on what can and cannot be taken out of the pot to meet the costs and profit expectations of providers.
Above all else, pensionation will happen when we accept that the purpose of pensions is pensions and that all the time , energy, tax-relief, contributions and consultations are spent for that common purpose. Otherwise we will move over time from a pensions system to a savings system, which will not resolve the long-term need we have for a decent income in retirement that lasts as long as we do. – that provides us with dignity in retirement.
Henry, thanks for coming yesterday, as always you added valuable perspective and fresh thinking into the discussion. And now a new word too!