Mark Ormston

Mark is a touchstone for this blog, not just because he is young enough to represent “next gen” pension thinking , but because he thinks things from first principals, what matters to people’s pensions matters to him.

So it was no surprise that he picked up on what clearly matters most to most people and wanted to discuss the news that the window for topping up state pension credits has been pushed back to July 2025 meaning that millions of people with incomplete national insurance records, can top up their pension credits to get all or most of their full state pension entitlement.

Speaking on Nico and Darren’s VFM podcast, he pointed out that the state pension doesn’t get the bandwidth it deserves in discussions about pension engagement – because it competes with the private sector for attention and for people’s money.

Investing in state or private pensions?

Judging by the relative demand for DWP’s pension wise (which is underused in advising on private pensions) and the DWP’s pension service (which is struggling to meet demand for help on state pensions and benefits) we might conclude that for most people, there is more value in the state than private pensions.

Buying “added years” of state pension is a straightforward transaction, you get quoted a cost depending on how much of the year you have already got credit for and pay for the rest.

This year’s top-up for a missed qualifying year currently costs £824.20. It’s cheaper if you’re topping up the two most recent tax years, which would cost you: £800.80 for the previous tax year (2021-22) Or £795.60 for the 2020-21 tax year.

Is this value for money? You are buying insurance against living too long at a fixed price, you will get a string of payments that last as long as you do  which protect you against inflation via the triple lock.

It is a choice available to anyone who doesn’t have a full history and you can find out whether you have that choice by checking your state pension forecast here

It was good to hear the “competition” between state and private” pension benefits being part of a VFM podcast.

CDC v annuities v drawdown

Another topic of discussion was whether CDC – where offered as a pension, should be positioned as the default option for people “retiring” from a workplace pension scheme.

Claire Altmann and Simon Eagle had said they should be at a session of a recent PLSA event Mark was keen to engage Nico and Darren on how CDC pensions were positioned relative to annuities in the choice architecture.

If you are running CDC as your workplace pension, as Royal Mail will, the choice is “take it or leave it”, but when you have a CDC offered to you at retirement – should it be another investment pathway – competing with annuities, drawdown and cash, or should it be something you get unless you opt out of it.

Again this is about relative value for money and competition between a collective solution and a personal one. Mark was very good at emphasising the commitment people make when purchasing an annuity, for most people it is an irreversible decision. Mark asked whether CDCs should be irreversible like annuities or flexible like drawdown and cash.

There are some interesting trade offs here. If the cost of flexibility is a lower pension , would people consider having property rights a price worth paying.

Are pension freedoms offering greater value for money?

As the discussion on choices continued, it broadened into a more philosophic debate about choice and its value.

Many people who choose an annuity , still do not maximise the value of their choice by comparing the market (as they can do with Mark’s firm- Retirement line). Many people fail to maximise the value of their purchase by getting their life expectancy assessed by a professional underwriter (it’s a one way bet in your favour).

And the question of inflation protection is often ignored in favor of getting the highest possible initial pension. This problem is less acute since the pension freedoms, as only about one in ten of those retiring explore annuities as an option.

But what about the other 90% who ignore the annuity option? Are they benefiting from pension freedoms by disregarding annuities?

Are people getting better value from drawdown?  Recent market conditions have meant people looking again at annuities as a safe haven product but are these choices exclusive to the financially sophisticated, are the silent majority of savers getting left behind without a clear default as to what to do?

These are questions that I have discussed with Mark and they deserve more discussion. In Australia, the Retirement Income Review is requiring clearer direction from the fiduciaries of Superannuation Schemes on retirement income options. These fiduciaries are encountering the same difficult questions as were being discussed on this podcast

The value we get from the choices we take

You can see why the DWP chose to avoid “decumulation” in V1 of its VFM Framework.

The value of choice will only be assessable over time , we are less than ten years into the pension freedoms, we cannot tell how removing compulsory annuitisation will have impacted private pensions till we can compare with the benefit of hindsight, the annuity value of private pensions relative to the money drawn and retained through investment pathways and through whatever decumulation defaults emerge.

We are expecting another consultation on the conversion of pots to retirement income this summer. Inevitably it will reuse the language of VFM (outcomes based analysis).

But while discussion will focus on the relative value of collectives , annuities and flexible drawdown, there should also be a discussion on the value of choice.

Thanks to Mark Ormston for getting that discussion underway. I would thoroughly recommend you listen to him on this podcast.