The Government is introducing a Pension Schemes Bill which, among other things will require pension schemes to offer retirement products so people have a pension and not just a savings pot when they stop work.
The Bill places duties on trustees of occupational pension schemes to offer a retirement income solution or range of solutions, including default investment options, to their members.
This has generally been taken to be no more than an extension of previous thinking on the matter. However it opens the door to a new concept, an invested defined benefit pension offered by a defined contribution occupational pension scheme.
As a recent survey by Scottish Widows showed, the offer of a lifetime pension is what 80% of savers want. When asked if they want an annuity , 90% of savers say “no thanks”. What is it about “pensions” that turns people on?
My view is that people still regard pensions as a collective endeavor where money is invested over time for better returns and for social good. That idea is not associated with annuities.
I also think that people associate annuities with bad value for money because annuity rates don’t offer them the long-term value they associate with pensions.
And finally people associate annuities with reverse life insurance, where insurers profit from you dying too soon. Pension Schemes are associated in the public consciousness with pooling of risk. However both pensions and annuities are diminished by the popularity of the “inheritable pot”, offered by drawdown.
Scottish Widows are right to point out that people do not want to commit savings to a pension or annuity where there is little prospect of “value for money”. The provision of a money back guarantee from a pension or annuity can reduce this phobia and the cost of this becomes a trade-off against a larger but uninheritable income stream.
In my view, the idea of a pension paid by default from an occupational DC scheme such as a master trust is likely to appeal to around 80% of us, especially if offered with a money back guarantee. An annuity does not do the job.
Can defined contribution schemes offer defined benefits
As regular readers of this blog know, it is now possible to provide a scheme pension backed by capital rather than by a promise of future contributions from an employer.
Not only is this possible, it is being done and it is known by pension experts as a “capital backed journey plan”. It is the idea behind pension superfunds, which also get promotion in the Pension Schemes Bill.
As with CDC, the idea of the capital backed journey plan has so far been linked with a sponsoring employer, the capital improving the chances of scheme pensions being paid or surplus being extracted through run on.
As with CDC, the future of the concept lies more with individuals who need the means to turn pots to pensions. The capital backed pension plan for individuals has already been designed and is being used by a few savers who have worked for Pension Superfund. It is likely to find its way into certain master trusts and occupational schemes as a means to turn pots into pensions and it will rival CDC schemes by offering the guaranteed pension rather than the pension dependent on market returns.
A new way of getting paid a pension for our 11m new savers.
Auto-enrolment has brought 11m new savers for retirement. They sit in workplace pensions which currently offer no pensions.
The Labour Government has wisely decided to meet the need of the 80% of us who want a pension and not an annuity and are prepared to swap freedom for certainty.
They are lucky to be catching the wave of a market revolution created by superfunds and their close relations, capital backed journey plans. It is good that at this time, there are far-sighted organisations ready to meet this challenge. If you want to know more about the one I represent – Pension Superhaven get in touch at Henry.Tapper@psf.capital