In this blog, I look at the second half of a letter from Mel Stride and Jeremy Hunt to the Pensions Regulator – Nausicaa Delfas. In the first half, the letter outlines the need for DC pension saving to become more efficient in delivering better value for the people who use it- the focus being on control via a dashboard, purpose via a pot for life and delivery via investment into long term assets. My reading suggests that the Government
is not focussing right now on more saving but better saving.
The second half of the letter deals with the deep legacy of funded pension promises made since the last world war,
A better market
The Government is looking for the pensions industry to re-organise itself around a different set of governing principles.
The central theme is that pensions should roll-on into the future with no end in sight. This is how the state pension works and frankly the basis of society. Governments do not pull up the drawbridge on the future and why should pensions.
So while most of the talk about a restructured market is on “consolidation”, I do not see consolidation as the biggest idea. As with the view of DC saving, there is a deeper purpose implicit in the market reforms proposed in this letter.
The purpose of running pensions on is diametrically opposed to a vision of “buy-out”. There is no other way of saying it.
That the majority of DB pensions will “buy-out” over the next 10 years has been considered not just likely but highly beneficial to the nation, for some time. Consequently, the Treasury, the PRA and BOE have consistently referred to “bulk annuity purchase” by pension schemes as moving towards a “gold standard”.
The letter only mentions buy-out once when the Pension Regulator is charged with “encouraging alternatives to DB de-risking and buyout”.
This is a very different message to the one embedded in the current version of the Pension Regulator’s DB funding code and quite opposed to the implacable opposition shown to date by Treasury, PRA and BOE to pension superfunds. It is a departmental u-turn of some proportion.
To understand that u-turn, you have to understand the nature of buy-out by an insurer. When buying out a “gilts + equity” investment strategy is exchanged for a strategy that primarily invests in corporate debt (bonds). Losing gilts and investment in long term assets breaks two out of the three of Hunt’s golden rules, the third – improving member value – is arguably broken by the 20% premium a company needs to pay to an insurer to get rid of its pension scheme and the liabilities that go with it.
Bulk annuities are so incompatible with the Mansion House reforms, that the Treasury has now to spell out that the Pension Regulator should now be encouraging schemes to look for alternatives.
This is a radical and as yet, under-appreciated aspect of the Mansion House reforms. I wonder how many of the insurers who signed the Mansion House Compact, considered that the reforms would come with a sting in the tail.
A common purpose
Why I support Jeremy Hunt’s, Nausicaa Delfas’ and Mel Stride’s approach to a national strategy is because it is coherent and makes sense to ordinary savers as well as at a macro-economic level, It is a vision that I suspect gets support across parties, I have heard nothing from the Labour Party to suggest that Rachel Reeves would not also sign this letter.
While the direction of travel for most CEOs and CFOs of UK corporates is to jettison any ongoing connection with their DB pension obligations, this can now be done using superfunds as well as buy-out. The Government is explicitly promoting superfunds and for good reason. They can invest in gilts and productive finance and can adopt a long term vision known as “run on”. Some schemes will continue to run on under the steam of their sponsor and some schemes will take co-sponsors and the capital they can bring, There is no reason why scheme that are open cannot stay open and it’s possible that some schemes that are closed may reopen to pay pensions to those who have yet to benefit from defined benefit pension schemes.
Powered by investment in long term assets and not just by debt, pension schemes can be more ambitious r.
This common purpose is aligned with the Government’s vision of a new kind or integrated risk management where the stakeholders are Government, the pension schemes and the members, This is not new; this is the compact that led to the granting of pension schemes the taxpayer-granted incentives that have made them so successful.
Back on track
In time, we may look at the last quarter of a century as a divergence from the common purpose, a divergence which has led to a loss of value. We may now – at last – be getting back on track
If you don’t have a destination anywhere will do.
If the State provides 50% of a living wage then the individual needs to do the rest. The target needs to be dynamic and in the real world. All these fine papers concentrate on a future journey with no destination in mind. It also needs to be simple.
The increase in state pensions is welcome, taking the new state pension to £221.20 a week (£11,502 a year).
Nevertheless, the state pension alone remains too low to provide a comfortable retirement. In early 2023, the Pensions and Lifetime Saving Association (PLSA) suggested that to achieve a ‘moderate living standard’ in retirement in 2022 would have required the yearly levels of net income set out below:
UK excluding London
Single person
£23,300
Couple
£34,000
London
£28,300 & £41,400
For a couple living in London an RPI linked annuity would require a fund of £500,000 to generate £20,000pa with 100% spouse benefit
Very well summarised Henry.
This along with the sot of issues aired at the recent forum sponsored by the CISI on 25th October do all start to make a most compelling intellectual, financial and moral case for policy makers and thinkers to design a system where pension schemes are invested as an integrated continuum for the good of the economy and by association for the good of pensioners.
But we shouldn’t underestimate the power of the vested interest to prevent progress, shackling us to a model that denies workers pension accrual, and de-risks the schemes so they can be bundled and handed over for insurers to reap the rewards.
Not helped by the insurer infused mindset pervasive and embedded within TPR. We need the TPR to be an agent for increasing workers’ pensions, and less as the unofficial trade body for insurers….