It will be an interesting week. On Tuesday, our Pension PlayPen group will be discussing “innovation in decumulation”, a title that hardly has the common touch.
For those who have a pension pot and want to spend it, there is no obvious way to “get this done”.
The Government is looking at ways to organise things so that people who don’t want to manage their pensions, can have their pension done for them. We could return to the days of mandatory annuitisation but I reckon those days are gone. We are now in a world of the path most obvious , where we look at what people like us do , and choose to follow suit.
This is the age, not of mandation, but of the default and whatever prevails as the default way to get spending done will be deemed the innovator.
The stakes are high, on Tuesday, Kevin Hollister will put forward his proposals to meet the needs of what he calls a £500bn market. Half a trillion pounds is the amount that will be spent by those with pension pots over the next ten years.
There are two polarised views on how this spending will be done. Kevin’s view is that new technology, especially AI, will Guiide people to set the right drawdown rate for them and help them manage their cashflows with due regard to their risk appetite and long-term spending needs.
My view is different, that people budget to their income and that the common purpose of pension schemes, whether DB or DC is to provide a consistent income against which a budget can be set.
Kevin would have us treat our pension savings as wealth, I would have them treat them as income that can be purchased. It will make for an interesting philosophical debate but in practice, one view must prevail over the other in time. If we are to have a default means of spending our money, one gauge must triumph, just as with railways in the nineteenth century.
The Government’s agenda
Despite the private sector wavering from the common purpose (witness the nomenclature of the PLSA), the Government still has a Department of Work and Pensions and a Pensions Regulator. It could have a Department of Work and Savings and a Drawdown Regulator but I suspect this would not go down well.
In the announcement of the Pension Schemes Bill (yet to be published), the DWP proposes that trust-based schemes be legally required to offer retirement income solutions to members, including default investment options.
As Tanya Jefferies put it in the Mail, there are
Moves to require pension schemes to offer workers ways to turn pension pots into an income when they reach retirement, not just send them off to find their own solutions
Between the DIY of drawdown and the dead-hand of the annuity, there is a third way. It involves the investment of our money and does not rely on the voodoo economics of the annuity’s matching adjustment.
It has been spurned by the pensions industry for a quarter of century as unsupportable. It is the “scheme pension”, provided collectively by a pension scheme. Historically the pension scheme was deemed “occupational” but the link to the employer has been broken. Employers no longer want to stand behind the pensions we get for life.
We are now in a new era, where it is capital rather than an employer , that will back the pension promise. The pension promise is the same as ever, all that has changed is the source of certainty , the provider of the guarantee. The underlying investment that supports this capitalist approach to pensions is the same. Capital Backed pension schemes offering people a chance to exchange their pot for pension will be invested in the same way as occupational schemes.
The DB funding code will apply, there will be the same conversations about the capacity of funds to take risk and Government will continue to be torn between a desire to see funds invested in productive capital and the need to meet pension cashflows.
I expect the Government to promote capital backed pensions for individuals as they are promoting them to employers who want help in paying pensions.
How the £500bn will be spent
In my view, there is capacity to deliver millions of such scheme pensions to those who have retirement savings pots. Research suggests that around 80% of us would favour having a pension paid with a consistent income over the rest of our lives. If there is capacity and demand, then the inevitable consequence is that this approach will win to support the common purpose of retirement saving.
Which is not to discredit Kevin’s work, which offers the freedom that 20% of the population prize higher than certainty. For them, the development of tools that enable people to manage income from their pots will be a key differentiator and I look forward to hearing about the tools that Guiide and others are developing.
Collective solutions for the bulk of us
Wherever we look around the world, we see self-determined pension plans being used by a minority of financially literate and confident individuals, while the majority use pensions in the more traditional sense, as a means of insuring against money running out before they do.
Whether through pooling, reinsurance or through annuity buy-in, schemes will find ways to manage longevity risk through scale.
So – the power of collective investment into long term assets that drive pension surpluses and the economy will reassert itself.
The key elements ignored are
identify who is at risk
what revenue stream is relied upon to make the investment perform
what security gives the cover for a default
Where is the lazy money that can become more productive
does the income provide for only one life
There are plenty of useless investments such as Cash ISA a wonderful way to guarantee loss of buying power.
most NSI products are poor value and I suggested many times that the Government via NSI should market a single and two life indexed annuity and even make this compulsory until the living wage is exceeded. All the mortality benefits would flow to the client or the government (other members of the population). The profit element could be utilized by paying down national debt.
Risk is with the Government (the population) with an incentive to hold down inflation. repayment of short-term gilts would reduce servicing of the debt to the market.
Henry is proposing a similar capital backed annuity and for those who wish to gain a better annuity rate with greater risk to the client much better than being trapped into equity/bond/cash outdated model
CEO’s on £4M a year and a short carear horizon enriched by buybacks and share option games might also be addressed in order to boost productivity per capita for UK plc