“Money and pensions” have an interesting relationship.
Of course a pension is just money paid to you over time and its financial value really depends on how long we live.
Where the pension is paid from a pot, it is usually purchased by the pot of money we’ve built up, hence the phrase “a money purchase pension”.
It amuses me when I’m talking to regulators that the DB pension that I am helping to establish pays pensions purchased with money. For me, the value for pensions we pay is determined by the amount of money people have to pay us and how long we expect each purchaser to live.
This allows me to muse about how VFM might turn into VFP or value for pensions, where the VFM measure may be the pension purchased rather than the value of the pot.
This actually makes sense of lifestyle as if the measure was the certainty of getting a level of pension, then de-risking makes some sense.
But to get to a measure of pension outcomes as Pension VFM we need to start thinking of a pension as the obvious (default) outcome of having a pot . We are a long way from that!
The DWP have said that they expect to extend VFM to what they call “the decumulation phase” of pensions. “Decumulation” of course means nothing to 99% of savers – I’m not sure it means much to anyone – even the DWP.
The fantasy that we will have a national pastime – managing pension pots in later life may still live on in some right-wing think tanks, but like the “portable personal pension” it needs some sense-checking.
Sooner or later we will either go back to buying annuities (nice for insurers, not so nice for savers) or we will move back to a genuine money purchase culture where money purchase pensions are part of the VFM Framework.
You can’t really say of 80% of workplace pension savers
millions of hardworking people who will largely rely on a defined contribution (DC) occupational pension to give them a decent standard of living when they retire.
and then ignore what they are relying on!
The value of pensions
There are important VFM questions that need to be answered.
For people who want a consistent income that lasts as long as they do , there is one obvious choice – the annuity – and two less obvious choices , the CDC pension and the occupational pension. The occupational pension that TPR mentions above is not a pension at all, but a means to deliver the money to purchase a pension.
Let’s hope that we can move this conversation on. I have written today about how disappointing it is that the conversation about VFM has got stuck and not moved on. I had hoped we could be talking about the value of pensions by now but it is still too early.
CDC has not developed as it should have, the annuity market has not recreated with-profits and unit linked annuities and the tontines lobby – remains – in the lobby.
The one development that is being taken forward is the capital backed DC occupational pension providing a defined benefit by dint of a capital buffer. The value of such pensions is easily compared with the open market for annuities and non-guaranteed alternatives.
In many ways, pensions are the most comparable of financial services. Assuming we can feel that the security of the pension is comparable , then the “rate” is the key determinant, features such as capital preservation, joint lives, levels of escalation can all be easily compared.
The likelihood of surplus distribution from an invested occupational pension is easily discounted , perhaps too easily, but it may need to be totally discounted to get pension/annuity comparisons off the ground
AgeWage’s work with Retirement Line suggests that all variants of lifetime annuities (including impaired life annuities) can be compared against comparable pensions, (properly sponsored).
It is a first step towards a value for pensions measure, one that is shamefully overlooked by regulators and legislators.