Barker

Altman

The Government is at last getting round to doing something about the mess that we are making of retirement decision making.

The DWP is saying that it will be consulting this summer over ways to turn DC pots into pensions.

Speaking to the PLSA, Julian Barker, DWP’s Head of Policy on CDC said the public  wanted a “clear expectation” of what’s available , but that the DWP  is stopping short of mandating what should be done.

I can understand that the DWP  cannot prescribe a default. It needs to hear from the pensions industry what works and thankfully there are people prepared to stand up and be counted for their views.

Since the introduction of the pension freedoms “nobody has had to buy an annuity again”,  but the Treasury’s intervention meant  more than that, it meant that nobody had to do anything with their pension again.

For everyone who has cashed in their pension for a kitchen or a Lamborghini , their are three who have done nothing and are waiting for something to come along that does the decision for them.

While this suits the pension industry well, (since no claim on the pot means longer to earn on the pot_, it is not what a pension system is about, a pension system is about paying a wage for life to give people dignity in old age.

Rather than persist with the libertarian ideal that everyone makes a decision for themselves, we have learned that an opt-out is more effective in meeting public policy objectives and (in the matter of pension saving) meets with public enthusiasm.

In as much as inertia creates the impact of compulsion, people have come to think of auto-enrolment as some form of compulsion

“Some form of compulsion…” to drawdown a pension

One provider – Standard Life – is suggesting that for progress to be made we need some form of compulsion. Claire Altmann told a meeting at the PLSA investment conference that to convert a DC scheme to CDC – for members looking to draw a pension, there would need to be just such a “clear explanation”. [I was not at the meeting, thanks to Laura Blows for this report]

The two ways to achieve this, [Altman]  explained, would be to have decumulation-CDC as a default option for members coming out of a master trust, and to have people unable to leave the CDC product once joined, “because if you don’t, I just can’t see how you could be confident that you could maintain the scale required”.

According to Altman, modelling shows CDC scheme require upwards of 5,000 members to work effectively.

Claire is right on three counts; firstly, to have a realistic chance of providing a better income for life than an annuity, you need scale and a regular flow of new members replacing those that die.

Secondly, you cannot rely on people signing up for such an arrangement, it is too tough a gig.

She is also right to say that there needs to be a way of ensuring that people do not get nudged into an arrangement which is not in their best interest.

Altman also suggested that decumulation CDC schemes would need to be medically underwritten, as otherwise members may receive a better income with a medically underwritten annuity, making CDC “very difficult to operate for trustees”.

 

Finally she’s right that employers need to be indemnified against the pension promise reverting to them – if expectations aren’t met.

…she recommended that the CDC legislation have some form of ‘safe harbour’ for employers, explaining that anything that could lead to additional liability would be a reason why employers could push against CDC.

“As a provider you don’t want to wake up one day and find you have an additional liability. So, I think there has to be something in the legislation that does not require the sponsor of the CDC scheme to indemnify benefits,”

If the Government’s summer consultation focussed on these three interventions, I believe that the pensions industry has it in its power to deliver collective decumulation , not as a standalone whole of life scheme but as the default option for those who cannot choose what to do with their pension.

And here we need to recreate a concept that has, since the introduction of pension freedoms, become obsolete – the scheme retirement age. Here I mean “scheme” in the widest sense, referring both to the rules governing an occupational arrangement and those that determine the end point of lifestyling within grouped personal pensions.

The scheme retirement age needs to be repurposed to be the point at which the pot is turned into a pension, the point at which an election to take tax-free cash is made, the point at which the opt-out from a collective solution can  be made.

There will be those who argue that a truly collective arrangement relies on the weak to support the strong (so no underwriting). There will be those who argue that to run a collective pension arrangement, you must today offer property rights – the right to a transfer value when in receipt of your “AgeWage”.

These are the niceties, my personal view is that you can have underwriting or transfer values but having both probably devalues collectivity beyond repair. I lean in favor of underwriting, not least because it will engage millions in the process and create the friction that might otherwise lead to litigation later.

This of course does not mean people can bring their selected retirement age forward to the normal minimum retirement date, nor that they can’t push it back. But the decision to go early or late would, with an effective scheme retirement age, be an election.

There is always a default

We are dumb to think that doing nothing lets us off the hook. By doing nothing for those wanting their money back, we are forcing people to choose how to manage their post retirement affairs with too little guidance and usually no advice.

People are aggrieved about this and I believe most people would welcome a default solution that did things for them and provided them with a clear expectation of a better income than that available from an annuity.

For those who want certainty, there is an opt-out, for those who want freedom, there is an opt-out. Currently the default is to do nothing – this is not satisfactory.

Leave of absence

I should add that my absence at this meeting was because it was concurrent with a meeting on VFM. I had split loyalties. Thanks again for Claire and Laura for articulating what are – to all intents – my views