My very good friend Carsten Staehr has sold his interest in payroll to pursue his interest in his family, sport and alcohol (running a wine bar).
Tales of Carsten are numerous and I will not rehearse the excesses that have characterised our relationship. Instead, I’ve been pondering this table he has posted as part of my thinking on the Consumer Duty.
As you will know, I am keen to find a way to validate a default solution that trustees can put forward to their members as a means of spending their pension pot and I find this four stage chart very helpful
My validation
- Ordinary people are baffled by pensions which they think provide them with an income that lasts as long as they do but turn out to be a pot of money with options called “pathways”. This is a genuine problem for customers
- When presented with a means to turn pot to pension using an occupational pension scheme paying 10-15% more than an annuity, 57%* of savers said they’d like to use it. More than half of the population would prefer a pension to other forms of pathway. Customers see value in the proposed solution
- We cannot deliver a solution that customers can use alone, we need the co-operation of occupational pension schemes – especially master trusts to deliver the solution inside their pensions. Tother we can deliver the scheme pension
- Can we capture sufficient value from this innovation? The value is created from investing in long term assets (rather than using bonds and cash). This value is permanent and demonstrable over 60 years. It creates profit for the provider of the service and for partners.
Using collective pension schemes to pay pensions is nothing new. We have always known that there is an inherent advantage afforded pension schemes over insurance annuities, provided there is the will to capture it.
There are those who consider that the only covenant worth considering for the provision of an occupational defined benefit pension is a large employer such as Government, the Universities , the Railways Pension – all quasi Government funded. And this view extends to the investment of money. The Mineworkers scheme can invest entirely in growth assets because of a strong covenant (a crown guarantee).
My view is that there are other types of covenant which are equally valid. A covenant of a capital buffer, provided with the help of the capital markets is of equivalent value to the customer. The Pensions Regulator has acknowledged this and encourages sponsorship of DB pensions using Capital Backed Journey Plans.
It is entirely consistent that a DB plan can be used to convert DC pots into DB liabilities with a DB plan paying pensions where a sponsor cannot or wishes to withdraw from doing so. Indeed, the retreat from paying pensions by employers who do not see this as their business is the opportunity for those with access to capital to take advantage and supply consumers with what they have wanted, expected and now find themselves without.
People do not look too deeply into pensions. A survey by Nest of its DC customers found that over a third thought they would be getting a Government pension from their Nest pension scheme.
It is not surprising that they think this. They know or pensions through the state pension and through the occupational pensions their parents are receiving. When it comes to be their turn, they expect that something similar will be done for them and that they will get a wage for life solution when it’s their turn.
People want to know the rules, want to get fair value and are happy for the rest to be done for them.
