Below is one of three positive messages I got from people who listened to a staff briefing by Nausicaa Delfas , the new CEO of TPR.
I have just listened to a great talk and Q&A by Nausicaa on her first month thoughts. People saying D.C. decumulation is the big pension issue ranked very high, rightly (and has been since 2014). And we need a default. Yes. But then think annuities. Open market option not taken up. Scandalous. How do we avoid that? Answer – there is no perfect answer. And we risk a disaster if we don’t accept that.
It is really encouraging to hear staff say positive things about their new boss and also encouraging to hear TPR discussing the turning of pot to pension (DC decumulation) as a high priority issue.
Finally, it is good to see some nuance in the discussion about how people take decisions around how they get paid income from their retirement savings.
We have learned from 1970 to 2014, the heyday of “money purchase“, that requiring people to buy an annuity with their money is a bad idea.
We have learned from pension freedoms 2014- 2023 that not giving people a “retirement income covenant” – a clear way forward for their savings – is still a bad idea.
We have learned from auto-enrolment –2012-23 that giving people defaults and the right to opt-out of them is a good idea.
Simple lessons from pension history
What my correspondent is telling me is that lessons appear to be being learned from what has happened in the past.
The polarized world of institutional pensions regulated by TPR and retail pensions regulated by the FCA died many years ago. Nausicaa Delfas comes with 20 years service at the FCA and is a hit at TPR, why?
Well I’ve met her a couple of times and I’d say
- She listens
- She has no prejudice
- She is focused on good outcomes
These are qualities that make it easy to learn from history.
History tells us what works. The two great successes of private pensions since the second world war were the creation and maintenance of DB pensions which pay income to millions today and its replacement with a savings culture where people build up retirement pots through payroll saving.
These pots are yet to provide pensions and it seems that the people at TPR are listening to the pain of people like me who struggle with the nastiest hardest problem in finance – turning pots to pensions.
But , better than that, TPR seems to be learning that a command approach to pension provision, as prevailed in the era of “money purchasing annuities” is over, as is the era of guaranteed scheme pensions (at least those backed by private companies).
But TPR has lost its grip on what we do with the money saved for our retirement. Rather than creating a third way where people could – as is happening in Australia – expect a retirement income from their savings, it has looked on as the FCA developed investment pathways. These pathways, designed to help people make choices, are better than nothing but they remind me very much of the way the early DC schemes worked.
Prior to the introduction of default savings (through stakeholder pensions) people were required to make decisions on how to manage their retirement saving. They struggled and they struggle with investment pathways.
Part of the success of auto-enrolment was that adopted the use of defaults pioneered in the less successful stakeholder pensions and with default joining hooking up with default investing, most people found themselves saving into strategies that were “good enough”.
The design of stakeholder pensions was down to the FCA (FSA in those days) and the design of workplace pensions for auto-enrolment was down to TPR. It is now possible that the Pensions Regulator, under the direction of an FCA lifer, can extend the idea of defaults (with an opt-out) to the way we organize the choice architecture at the inflection point when we stop saving and start spending.
Innovating around needs of people
What remains to be seen is what default strategy emerges. It could yet be an annuity – though I suspect it will be an investment annuity which guarantees little but the right to an income for life. In the US this is known as a modern tontine .
It could be a scheme that operates like a scheme pension , before scheme pensions were guaranteed and provides an income without the guarantees of a DB plan but with certain advantages that should mean people do better than they would out of an annuity.
Or it could be that some schemes revert to a default retirement income where the default is a conventional guaranteed annuity.
But whatever the default income option , we seem to be learning from history. As my correspondent concludes, the worst thing TPR could do is to decide it is 100% right
Answer – there is no perfect answer. And we risk a disaster if we don’t accept that.
The most pertinent comment above is “the worst thing TPR could do is to decide it is 100% right”.
Its clear the culturally for some time now TPR has behaved as though it has some moral and intellectual superiority on pension funding. I think it comes from many having a consultancy background, where they’d expect to be called upon and listened to as the “experts”, and this added to obvious group-think has resulted in a very statist approach being forced upon the industry and Trustees.
The best consultants I’ve worked have that rare ability to truly listen, and to think widely about the issue, bringing a broad range of experience and wisdom to the solutions.
Most of us involved in pensions are deeply passionate about ensuring pensions are paid when they fall due, and there is some brilliant talent across the Trustee boards and within the investment community. The TPR needs to provide sufficient space for those voices and talents to emerge.
I came across a relevant quote the other day from Thomas Jefferson, which I found relevant for current times:
“Experience hath shewn, that even under the best forms [of government] those entrusted with power have, in time, and by slow operations, perverted it into tyranny.”