Today I’m talking with the Pension PlayPen about what the industry calls “decumulation” but which is properly called “getting a pension”.
A pension is something that is paid to you , by someone else in return for money or services. The long history of awarding people a pension goes back millennia, it is a reward that satisfiers a human urge, to have security in later life as we become mentally and physically less well.
But we have of late started thinking of pensions as things we can manage ourselves , we’ve started thinking of paying ourselves pensions. This is deeply problematic for most people and they know it. Is the kind of problem that people dread – making the money last as long as we do.
We might like to characterize the problem with the word “longevity”, but like”decumulation” , that word takes the business away from the ordinary saver. Longevity is of course the measure of how long something is – in this case – “lifespan”, but it is not a word that I’ve heard used in everyday conversation.
Nor , might I add, is the word “investment” a word that springs to mind when people think about replacing the income they used to get from work.
People save into a pension plan to get a pension paid to them, they sacrifice money throughout their lives so they can have money paid to them in later life. It is a passive expectation, there is no expectation amongst most people that pensions are “do-it- yourself”.
Pension Freedom is a minority sport
While we must respect the options people have not to spend their retirement savings but use their “pot” as inheritable wealth, we would be wrong to consider such an activity a “pension”. It is the freedom not to have a pension, as is the practice of cashing in the pot and keeping money in a bank account. For many people who do not associate with investment (and do not pay tax on bank interest) keeping money in a bank account looks attractive, but it is not a pension. Of course in rare circumstances, people may be well-advised to cash in their pensions if they have a marginal claim on pension credit but that is the only circumstance in which I can see an encashment of a pot leading to greater long-term security, generally, pension encashment ends in an immediate acceleration in a standard of living but not long- term security
We are at a stage in the auto-enrolment cycle where many of the 10m new savers since 2012 have but 10 years savings in their pots and they may well feel they may want an acceleration in their immediate standard of living rather than greater financial security, that is their choice but the choice has consequences. People know this, people do not cash in their pension without some sense of loss.
Drawdown – the promoted choice is not the obvious choice
For all the reasons presented above, drawing down an income from a pension pot is precisely not what most people want to do. They do not want to set and monitor the rate of income they should take, they do not want to assess how long they are likely to live and they do not want to invest their money. We might think they should but there is no evidence in any country in the world that people want to manage their own pensions.
All the evidence is to the contrary. When asked what they want from a pension, people describe an annuity. But when it comes down to it, people do not generally buy annuities. Though buying annuities with pension pots is becoming more popular, it is- like the freedom to not buy an annuity, a minority sport.
In this world of fractured choice, we forget one important constituency, those people who for want of self-confidence or out of confidence that something better will come along, do nothing but let their pot grow (or shrivel as has been lately the case). This constituency are people who for one reason or another do not know what to do and they are ignored by everyone. They are the pension orphans who have lost their guiding light and struggle to make headway in the penumbra, they are the people who we must address and present a new option to.
When will we see the return of the pension?
CDC is stuck
People want more from their savings than the income offered by an annuity, they sense that there must be better ways to be paid an income for life than by giving money to an insurance company. This is why annuities still only get around 10% of our retirement savings.
We may see in time the rise of investment annuities which look remarkably like what the industry calls “decumulation only CDC”. When we get to the point where we can align regulators, legislators, investment managers and longevity underwriters into providing non-insured investment driven pensions which offer 100% of the upside with no guaranteed floor, I will swing behind them.
But right now, this option does not exist and though Alliance Bernstein can talk of the CDC TDF, when questioned, they accept that this would require take-up running into the tens of thousands of lives. No one is ready to build CDC pensions yet.
The return of the “scheme pension”
This morning I will speak to the Pension PlayPen about “scheme pensions” and the concept of “reverse pension transfers”.
Reverse pension transfers happen when people who have built up a pension pot through saving or transferring DB rights into a SIPP, decide to buy into a scheme pension offered by an employer whose employment they join for the purpose.
There is one organization who is proposing to offer this service and those who follow this blog will know who it is. That organization is likely to be in the news today for other reasons – all positive!
The idea is very simple. The Scheme Pension aims to compete with annuities, offering a better income with comparable security. Investment, longevity and rate are taken care of by professionals, the pension scheme is regulated by TPR and backed by the PPF.
It is not a very radical idea, scheme pensions were offered by most DB plans throughout the second half of the last century and well into the 21st century. But employers decided that taking longevity and investment risk and setting the rate at which they’d pay pensions for pots was not for them- quite right too.
But that doesn’t mean that organizations with capital backing sufficient to satisfy the regulator, shouldn’t pick up the baton. If the sums stack up for the shareholders of a “for profit” sponsor, why not?
The quiet majority of people who currently sit and wait for something better to come along, need not wait much longer. I confidently predict that very soon , we will be seeing scheme pensions being made available through the usual outlets – DC master trusts, occupational DC schemes and workplace GPPS. They will be in some instance a fifth investment pathway, in others a promoted default and they will be promoted to people who choose to swap their pot for pension and have no connection with the workplace.
If you’d like to ask me about the questions raised by this blog, please log into Pension Playpen’s session this morning entitled “should employers pay pensions”. My answer is “yes” but only if they want to!