Can we really call a pot a pension? PIC calls the emperor’s new clothes

Yesterday, Pension Insurance Corporation called for DC pots to be redesignated as savings not pensions

Tracy Blackwell, CEO of Pension Insurance Corporation, said:

“Britain is in the middle of a generational shift around retirement funding as we transfer responsibility and uncertainty to individuals. That’s a huge change but it hasn’t been set out clearly to the public, and the way pensions and savings are described is an obstacle to better understanding of the reality of retirement funding today.

“We’ve had a huge shift in the systems we use to fund retirement saving. We now need a huge cultural shift to match it, learning from countries such as the US and Australia. Finding a new way to talk about defined contribution pensions, with employers taking a lead in financial education, would allow Britain to have a more honest and informed conversation about retirement funding.”

Laura Trott MP, Parliamentary Under Secretary of State at the Department for Work and Pensions, said:

“I welcome this report, which usefully adds to our understanding of how people interact with and feel about their pensions. It makes interesting and important contributions to the debate around pensions and I hope it is read widely, especially by employers.

“Greater engagement with pensions and a more active, informed public debate about funding a better retirement are strongly in the public interest and I thank PIC for publishing research supporting those aims.”

You can read the full report from PIC here, I will report on it later

Well done Pension Insurance Corporation

This is a good piece of work and I want to get it read by reporting on it. PIC is doing a job of work putting to bed the DB pension schemes that have had enough. I don’t blame the trustees or employers who buy-out with PIC for doing so, I suspect that their current and future pensioners will get a good experience having PIC paying them an annuity.

Well done for calling the emperor’s new clothes – most of us have pots but not pensions

To me, many of the problems we have experienced over the past 20 years have stemmed from the confusion between pot and pension

  1. People transferring out of “wage for life” DB schemes in exchange for a pot of money that becomes a source of worry
  2. Employers shifting from high contribution rates to meet ambitious pension  promises to low contributions that pay meagre pots with no ambition to pay a pension
  3. Pots being used to mitigate death taxes rather than being exchanged for pensions
  4. Huge amounts paid to intermediaries to manage problems individually which could be more efficiently be managed collectively.

The great social experiment of the personal pension was abandoned when the Chancellor stood in front of the house of commons and said

“from this day forward , nobody will ever have to buy an annuity again”

Rather than adopt innovation as his Pensions Minister was urging him to do, he went for the populist solution which now leaves us with personal pots and not personal pensions.

The sophisticated people who read my blogs will not mind, they are capable of using pots to their advantage, mitigating and deferring taxes, integrating the pot into private wealth and even recycling tax advantaged savings within the MPAA.

But the bulk of the population are now disenfranchised of the pension they were promised when enrolled into a workplace pension. Unless they are in the public sector, the only pension they will accrue will be the state pension, and that is barely adequate to lift them out of poverty.

The “pension system” as it is , for most workers is not a pension system at all but a “tax-advantaged savings alliance” between the financial services business and the financial elite.

Tracy Blackwell knows this, Laura Trott knows it too. The remedy for this situation is not to wind back the clock and reinstate compulsory annuitisation but to innovate. Employers may not be able to move from DC to CDC savings plans – as Royal Mail is doing, but they can move to a CDC accrual system, if the Government lets them. If multi-employer CDC is not an option for all employers following the King’s Speech, then Laura Trott’s words will sound hollow to me.

Individuals should have the option to swap their pots for a CDC style pension where the income is smoothed but ultimately linked to the progress of the markets. The practice of buying back DC pots into occupational pensions should be revived, where sufficient capital sits behind the pension promises. Annuities should compete with such solutions for the pots of the mass of us. Employers have the responsibility of choosing workplace pensions which give access to innovative solutions and not just the humdrum pathways now available.

All of the above could have been written by me in 2014. There is no new technology, no magic bean investment , no actuarial wizardry that has happened in the past nine years.

All that has happened since we got our pension freedoms is a political and industry funk, a failure of nerve to develop and deliver more suitable pension options than the insured annuity.

We cannot and should not call a pot a pension. We should however give the pension pot the promise of a wage for life, by providing more ambitious options than giving the pot to a life insurer.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Can we really call a pot a pension? PIC calls the emperor’s new clothes

  1. conkeating says:

    Back in the early noughties, in work that I did for the OECD, and presented to the international organisation of pensions supervisors in Istanbul, one of my recommendations was that we should stop referring to DC as pensions, as they are merely tax-advantaged savings schemes and lack the critical retirement income element. The show of hands as to adopting this practice was overwhelmingly against.

    I have never understood this resistance, but live in hope.

  2. Caroline Instance says:

    Did we get pension freedom? I am of an age lucky enough to have mainly DB pension savings, associated with a number of employers. I started taking my first at age 60. Knowing a little about pensions and, recognising I would be over the lifetimes earning cap, for flexibility I tried to transfer the last chunk to a SIPP. I could not find an IFA to take me as a client so could not do it.

  3. It’s not a simple change. There is a lot of secondary legislation, and presumably primary, that refers to pension savings, generally in advantageous ways. All a bit boring but it would mean a chunk of legislative time and effort if there were not to be unforseen consequences.

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