The master trusts and large occupational DC schemes that manage our retirement savings have been told to get on with becoming “full pension schemes” , echoing the Australian regulator in demanding these behemoths meet the needs of savers every step of the way to and through retirement.

They are being asked to do so in two ways. If they have developed their own capacity to help savers spend their money, they should offer in-house solutions, if not- they should partner with those who can.

There is no shame in not building it yourself, working with third parties is what big organisations do to accelerate growth. Typically the big fish end up eating the little fish, sometimes it’s the other way around!

This week, I’m focussing on how we deliver meaningful and manageable choice to those at retirement. There are two distinct schools of thought. The first says we have the products but not the guidance and the other is the other way round.  Yesterday’s blog looked at “choice architecture” and the mountain we’re making out of a molehill when it comes to presenting choice. My conclusion was that we will end up doing what we ended up doing with stakeholder pensions and then workplace DC- defaulting the majority of savers into an obvious product. The only problem with doing defaults right now, is that there is no obvious product. That has to change.

A bid for the obvious default

Right now, received wisdom tells us that “income drawdown” is the obvious product. It is for those who have income drawdown capabilities and believe the public wants to use them. But the call from the public is not for products that put their pay at risk from month to month and for the latter stages of life. That is exactly what 80% of savers said they didn’t want. Drawdown may meet the industry’s need but it only meets the needs of the 20% of us who value freedom to self-determine our retirement income. The rest of us want something rather like what we signed up to – a pension.

And for those arguing that because everyone is different , everyone needs their own lifestyled drawdown, modelled to their own anticipated cashflows, then I have two words = STATE PENSION. The State Pension does a pretty good job of paying a lifetime income to everyone , we know what’s coming and we have limited options as to how to get it. It’s one size fits all and it works. There is plenty of evidence that a default solution works – ask Britain’s 12.6 million pensioners (source DWP Aug 2023)

The biggest thing happening in pensions today could just be the shape-shifting of the Old Age Pension into the new State Pension, the move from unfunded earnings related pensions to a pension paid by right against 35 years of earnings.

Those who argue that you cannot change things by default should speak to Steve Webb and those at the DWP who made that dark blue box happen.

The State Pension has become the obvious default – one that in time , we will all get – should we live so long.

Sick and tired of complexity

Pensions aren’t complicated , we make them so. We start out with a clear idea of what we want “dignity in retirement through an income that lasts as long as we do” (my version of the common purpose). If we stuck with that idea , we’d have our obvious choice, our default.

But no- we can’t be satisfied. We are in the love with the idea of freedom but we have no idea of how to use it. We create pensions in the imager of the 64 blade Swiss army knife, with an application for everything but limited capacity to cut to the quick.

What people want is the freedom from freedoms (copywrite T Pullinger). The default pension is what the annuity wanted to be but failed. It is paid from an invested fund that is not time limited but will pay the pensions of our children and our grandchildren. It is the funded equivalent of the state pension and it is repleted by the savings pots of generations of workers accumulating wealth through monthly deductions from their salaries.

The only thing that should be different about DC, is the onus on employers which should be defined by the contribution rather than the benefit promise. The benefit of a DC pension should be a pension, not an annuity. We know annuities are bad value for people under 75 and very few people want to wait till 75 to get some extra value from the “matching adjustment”.

What our master trusts and occupational schemes should be providing – in return for being called workplace pensions – is a pension and if they can’t do this for themselves, then they should look to Pension SuperHaven and schemes like it, to do it for them.

The default pension for workplace pensions is in the process of being launched. For the technically minded it is a single sponsor capital backed journey plan with the capital providing guarantees of income and longevity protection being to a degree self-insured through pooling and to a greater degree through reinsurance and annuity buy-ins.

The default pension is invested as any low-dependency pension should be , with a high allocation to bonds and with growth assets invested for the long term with an eye to serious growth. Capital backing is similarly invested for the long-term with assets that look to provide productive finance , primarily in the UK.

This default pension will be able to sit inside the great DC pensions as the pension. It is not a pension to which DC schemes can hand-off liabilities (like a SIPP or an individual annuity) , it sits within the DC scheme – it is “inside” and a part of that scheme, it is a pension generated by DC contributions paid as a defined benefit.

This may sound far fetched and indeed one individual from the Pensions Regulator went so far as to say just that in the press. It is genuine innovation and when that happens, there is likely to be controversy.

Simplicity is very hard to achieve

To explain to millions of savers that their pot will buy them a pension may sound revolutionary to pension experts, but it is what 80% of savers want to hear.

To explain that the pension will pay an income like an annuity but only higher is exactly what the 80% of people who could buy an annuity but don’t want to hear.

To understand that the pension will not just be “available” but the standard way that people with a pot will get their money paid back to them , will come as a huge relief to those dreading the complexity facing them at retirement from the choice architecture of investment pathways and guided outcomes.

Of course there need to be safeguards (which is why we have regulators) but there also needs to be hope. I hope that those reading this  will want Pension SuperHaven to be inside a workplace pension they are in or that they can join – to get their pot paid as a proper pension.

We can go on repeating the same mistakes and making pensions ever more complex, or we can innovate and make things simpler. We did it with the state pension and we can do it with workplace pensions