For those  who promote workplace saving but not workplace pensions- look away. This blog is about turning savings into DB pensions.

Go for it Simon, Pension SuperHaven will be happy to oblige https://t.co/FyYuBssQOp

— Henry Tapper (@henryhtapper) March 9, 2024

It’s time I gave you an update on Pension SuperHaven, my and Edi Truell’s intention to return hundreds of thousands of DC savers to a DB scheme over the next few years.

My last blog on this is one of my most read of the year. I’ve had lots of people including representatives of employers, unions and civil servants, contacting me with their thoughts. If you’d like to know more about this project, drop me a mail to henry@agewage.com or henry.tapper@psf.capital. You can call me or text a call back on  07785 377768

Making tricky choices online

Pension SuperHaven will not have a direct salesforce who will knock on your door. This is an occupational pension scheme you can choose to join, and almost everyone will make that choice online.

One of the lessons I’ve learned over the past three months is how important and difficult it is to deliver choice digitally.

It’s not something that occupational schemes have spent a lot of time and energy doing. I don’t blame them. Historically occupational DC schemes have been cashflow positive and few have had to worry about large numbers looking to draw down their pots. This is changing, an estimated 700,000 of us are looking to start spending their retirement money each year. So the Pensions Regulator has started asking the same questions as the FCA have been asking over “investment pathways”.

The way we’re approaching this is to think about allocating money in three ways

1. Cash – money that is there to be spent on big ticket items and kept on deposit
2. Invested for income – money invested to provide income from drawdown
3. Purchased income – money exchanged for annuity or pension income

Keeping money where it is , is another option , but it’s just putting the decision off. At some time most of us will want to get at our money.

It’s this “option 3” which is attracting so much interest. To date , the only way most people could  purchase lifetime income was  through an annuity. A few DB schemes still take “transfers in” where a DC lump sum can be transferred into a DB scheme in exchange for a pension. This is an attractive  “perk” because the scheme pension is set by actuaries higher than an annuity.

But only members of the pension scheme have the perk, if your scheme doesn’t offer the perk – tough, if you want to join a scheme and you’ve not been an employee – tough.

All of this is changing with Pension SuperHaven (PSH), which is offering the perk without you being a member of this PSH pension. In making the transfer, you become a member of the scheme.

But without an employer to stand behind the promise , how safe should someone looking at this perk, feel?

The answer is that they should feel as safe as they should do in any other well funded pension scheme. That’s because the Pensions Regulator is ensuring that the scheme is funded to a level they feel comfortable with. The Pensions Regulator’s function is to protect members from failure and to protect the Pension Protection Fund from claims. Believe you me, the Pensions Regulator takes its job very seriously indeed!

You will not be able to buy a scheme pension until everyone is happy that the scheme pension gives equivalent security to a well funded sponsored DB scheme.

A PSH scheme pension will perk up your income in retirement!

So how big is this perk? What can you expect from a scheme pension is an income 10 to 15% higher than a like for like annuity.

Yes , you read that right, Pension SuperHaven offers a lifetime pay-rise of 10-15% over an annuity , that is huge and it is why we are bothering to do all this.

We can do this because Pension Superfund Capital is there to provide backstop capital to the promise, and it is able to do so, because of certain fundamentals. Over time, assets invested productively yield greater returns than money leant to Governments and corporations. This backstop capital is why PSH pays more than an annuity.

We’ve had a lot of questions about what is providing the  security of the promise usually associated with an employer. If a DB schemes looks like it can’t pay its employer is required to put money in as “deficit contributions”. The same happens with Pension Super Haven, except that the employer turns into a “capital buffer” a sum of money that can be called upon when investment returns on the main pension fund look a bit thin. The capital buffer itself is “backstopped” by Pension Superfund Capital, funded by Edi Truell and the markets.

So why wouldn’t everyone who was thinking about an annuity, not choose a scheme pension instead? There are many reasons for preferring an annuity

1. Emotionally you may prefer to have your pension paid by an insurance company
2. You may want a pension increasing at a fixed amount – PSH only pays increases in line with the CPI
3. You may want a fixed term annuity , where you can reset your rate at a later date if you can get a better deal
4. You may want a guarantee that your loved ones will get a lump sum if you die in the early years of the scheme. Not something that PSH offers.

Personally, I’d prefer a better rate but it’s not an open and shut case.

A share of the upside.

PSH is not a mutual, there are shareholders – of which Truell is the largest. Over time PSH is expected to make a good return to those backing PSH.

Truell is extremely confident that instead of worrying about putting money into the capital buffer , he’ll be able to take money out. This happens when investment returns on the fund are better than expected.

Built into the rules of the scheme are triggers which allow money to flow through the buffer back to PSF capital and if this happens, around 30% of the flow is paid to pensioners as “Christmas bonuses”.  If you feel as confident about matters as Edi does, you’ll feel confident you’ll get a handy Christmas box as part of y0ur pension. Truell’s keen to point out that a Christmas box is not the same as a pension increase – it certainly isn’t guaranteed, but the underlying pension promise is.

How the money’s invested.

Another question that keeps on coming up, is how the main fund is invested. This is down to trustees who have to be independent and make decisions with independent advice. Judging by the Pension Regulator’s latest guidance on mature DB pension schemes, we’d expect around 80% of the money to be invested in safe “matching” assets like gilt edged securities, while 20% can be invested in more aggressive “growth assets” but the exact details will depend on the trustees and the actuarial advice they get.

Then there’s the question of “guarantees”.

Guarantees are very contentious. We talk about “guaranteed annuities” but not of guaranteed pensions , but things could go wrong with an annuity or a scheme pension.

The person in the street wants the certainty of the guarantee, in pension circles we talk about “more certain pensions” but I think of the PSH as providing a pension from a pension fund guaranteed by the capital buffer of Pension Super Fund Capital

The Pension Regulator requires PSH to hold capital in the buffer to ensure that 99 times out of 100 over 5 years , there will be enough money in the pension and the buffer to meet the pensions promised. Annuities can go wrong too and they are backed by capital under a separate regime known as Solvency II. If an insurer goes bust , your compensation is from the Financial Services Compensation Scheme , if PSH goes bust, you are covered by the PPF.

There are arguments on both sides as to which of the guarantees is the stronger but we all know that the only thing really guaranteed are death and taxes.

The cost of these guarantees is “in the price”, that means that you get less from an annuity and from a scheme pension because of the guarantee. Remember that both annuities and scheme pensions guarantee not just the rate of payments but that the payments last as long as you do. If you don’t want guarantees , use drawdown or wait for CDC.

If you are a lawyer and want to take issues with the word “guarantee” in this context, please understand that I am not writing this blog for lawyers, this blog is for people who want a lifetime income that’s better than an annuity, that’s what we intend to give people.

How do I know the scheme pension is paying more than an annuity?

One of the first decisions we took was that no one should commit their money to a scheme pension  (and it really is a “no money back” decision) without making absolutely sure they couldn’t get a better rate from an annuity. The way we’ve solved this little challenge is to team up with our friends at Retirement Line who have promised to match our PSH scheme pension rate with the best annuity rate you can get from the open market. This includes getting the unhealthy rate you might get if you aren’t super healthy and don’t live in a posh area.

The PSH rate can also be tweaked if we feel you might not live as long as somebody of your age should live. We make this assessment using a complicated medical form which we’ve simplified. Retirement Line will help you through it , if you get stuck.

So, everyone gets online quotes as if they were as healthy as can be and reflecting their actual state of health. They can then compare the best annuity v the PSH rate like this.

PSH does not guarantee that the annuity we offer will be better than the equivalent annuity but we expect the number on the right hand side of the screen to be typically 10-15% than the number on the left hand.

A major innovation

This is no mean enterprise, it will require a major commitment from Pension Superfund Capital (PSF) requiring enterprise and innovation. Money in the growth assets will be invested productively according to the Mansion House principles. It means a new mindset from the Pensions Regulator who for 20 years have assumed that schemes will want to divest themselves of the obligation of paying pensions.

It will undoubtedly disrupt the hegemony of a small group of annuity providers and create considerable anxiety in the halls of the ABI. But this is what 60% of those interviewed by Aon in their CDC research said they wanted and we think there is a gap in the market for people who want a guaranteed wage for life that pays more than an annuity.

Are you eligible?

Anyone with a DC pot will be eligible to transfer money into the Pension SuperHaven. We aren’t taking payments from payroll or from people’s private resources, we won’t take in specie transfers and while we haven’t yet decided on the minimum contribution , it’s likely  you’ll have to have a pot worth £10,000 to make the exercise worthwhile, we will take smaller transfers but the amount will likely have to add up to £10,000.

We will help with the consolidation of small pots.

You can transfer in at any stage of your saving career (provided you are over 18 or under 75) but you can’t trigger a pension payment till you are 55.

How does the pension get paid?

The pension gets paid into your bank account from the point you ask it to get paid. Once you have made that decision you have a month to change your mind but once the pension is in payment , you can’t get your capital back- it is committed as it is with a pension annuity.

It gets paid till you die, or if you choose, to the second death of you and your spouse.

It can be paid at a level rate (which means it will fall in real value as inflation eats into it) or you can inflation link the payments (though we cap increases in CPI to 5%.

If the Pension SuperHaven fails, you will have your pension paid by the PPF under the PPF rules. If it fails while you are waiting for your pension to be paid, the PPF haircut will apply.

Will there be help for people with these choices?

Buying a scheme pension ,like buying an annuity is an important and irrevocable decision. It’s not to be taken lightly. You may want to kick the tyres more thoroughly, there will be information for those who do and for advisers. Many advisers will consider Pension Super Haven something they should talk to their clients about because of their Consumer Duty.

While you do not have to take an advice when transferring into a defined benefit pension scheme , many people will. Advisers will have their own due diligence helpline and access to detailed information (also available to diligent savers). This will be a transparent arrangement to everyone, especially the Pensions Regulator.

There will also be support targeted at the most difficult areas of decision making

1. Whether the time’s right to start taking money or should money be left alone
2. Whether to take cash, guaranteed income, drawdown
3. How and whether to split the pot
4. How to weigh up PSH with an annuity
5. Taking the plunge.

AgeWage is co-ordinating all the help you need using a digital journey

At the end of the journey , you will have become a member of the Pension Super Haven pension scheme and you will be in receipt of a pension for life – as AgeWage if you like!

I hope this makes sense.  It makes sense to me and if you’ve read this through and have questions please call me on 07785 377768 or mail me on the addresses above.

I’m hugely excited about this and hope you are too.

Important footnote on indexed annuities

Thanks to Kevin for this important question which deserved a proper answer

Kevin Hollister ; Actuary and Founder of Guiide

Hi, its great to see another form of guaranteed income come to market, but one issue it seems is that 82%  of individuals who do choose an annuity choose a non increasing one given the higher initial starting income. Is that a drawback of PSH?

https://www.abi.org.uk/news/news-articles/2024/2/2023-sets-new-post-pension-freedoms-record-for-annuity-sales/

My response

Nope – people can choose what they want to do with their money. Increasing income is the default for occupational pension and CDC schemes. PSH is an occupational pension scheme.

Thanks for the very important question and I will incorporate this point into the blog. The comparison between an annuity and a scheme pension needs to be on a level annuity because there is no CPI annuity option. The CPI pension will be priced using the same factors as the level one – ensuring fair value between the two. We expect to share details on this with those doing detailed due diligence – most crucially with the regulator. People need to feel confident that they are not ripping themselves off by buying inflation protection.