I missed this seminar on “risk-sharing” which happened back in November. Follow the link above to watch it – especially Paul Todd’s findings from Nest’s research of their saver’s buying habits.

“Risk sharing” is a misunderstood phrase. It is often confused with risk-transfer, our euphemism for shoving risk onto insurers (who are only too happy to take our pensions off our hands).

Risk-sharing is about pooling risk and sharing it rather than offloading it. So you could say that pooling assets in a pooled investment fund is a kind of risk sharing.

But most people don’t see a unit trust, ETF or insurance pooled fund is “risk-sharing” proper. Investing in a global equity tracker and drawing down from it, hardly satisfies our desire to solve the “nastiest hardest problem in finance”.

Risk sharing is not just about the upside – it’s potentially about taking risks for others. This is simply not explained, for most people, risk-sharing is not about having your cake and eating it. It involves the horror of the irrevocable decision

the mind works against us taking irrevocable decisions

Nest’s research highlights that people want a lifetime pension but don’t want to pay for it.

Risk-sharing was tomorrow’s problem, but the audience polling by Hymans confirms research by Nest, that this problem is creeping up on us.

Paul Todd’s description of the Nest demographic suggests that a large part of the Nest population is already ready to risk-share

My take-away on  this slide is to show that almost a quarter of Nest’s membership is over 50 and any attempt to tie it down by relationship and property status is unlikely to succeed. Nest is representative of the population as a whole with a bias against wealth and income.

This bias is shown by a further inspection of the earnings patterns of members which show remarkable consistency over time, Nest members do not benefit from a bulge in earnings in people’s thirties and forties. They are not people who would benefit from a final salary earnings formulation in DB – they are career average folk.

For those who worry about adequacy, these are people who are used to a consistent level of work earnings around £20,000 pa. For them, the state pension is now getting on for a pension representing 2/3 average tale-home  (taking into account tax and NI).

What is even more interesting is Nest’s overall findings about what people want from their “Nest pension”

Given that most of us, want everything we can get, it is notable that people prioritise the lifetime income properties of a pension or an annuity over inheritability and accessibility.

But faced with the choice of giving up flexibility, the picture is different

“Changing your mind” is a much bigger benefit for people choosing how they buy a pension or an annuity than having everything “done for you“.

This is a significant challenge to those who would like to establish risk sharing products such as CDC or scheme pensions – indeed it is the challenge that annuity brokers and providers face on a day to day basis.

Given a choice as to whether to press a button from which there is no way back, most people will withdraw their finger. This is the problem with annuity purchase as envisaged in the money purchase formulation and it’s why it was so easy for George Osborne to say that from the day of the 2014 budge, nobody would ever have to buy an annuity again.

People want an annuity but they want to change their mind

There are annuities (fixed term) that allow a reset after a certain period of time and they are popular with sophisticated people who know their way around or have advisers. But these kind of products require an understanding of financial services that most of us don’t have. As much as I’d like to say I know how to manage my finances, I have used defaults all my life and continue to do so.

So I would, had I not have had a choice, bought an annuity and pressed the button because I had no choice, now I agonise about choice – Terry Pullinger (the CWU man who was the architect of CDC) said he wanted Royal Mail postmen to have a pension where they didn’t need the pension freedoms. This is the ultimate goal of a risk-sharing pension.

It is also it’s biggest challenge, because taking a choice to hand over your bank details to a third party and press  a button that kisses goodbye to your rights to your money  – is a very hard thing to do.