It’s an exciting day for me;   we are hosting an industry event this afternoon looking at how we can turn pots to pensions. As I wrote yesterday, this is a hot topic for those involved in creating pensions out of DC workplace pensions and we intend to look at the problem through the eyes of people receiving such pensions, those providing them and those regulating these payments.

Our premise is that while there is a substantial proportion of the population who want to manage their affairs independently or with an adviser, the majority of us just want a regular payment made to us for as long as we and the immediate family need the money. Dignity in retirement still depends on a replacement wage which is why the Government regulate work and pensions in a single department.

This premise is based on the popularity of the state pension and the importance of its key features, a wage for life designed to increase over time and provide support to  spouses that outlive us. These are deep-rooted elements of our benefit system and for most people , the payment of a works pension , paid on some formula connected to lifetime earnings, was and still is normal. But it has become less normal since companies started closing their defined benefit pension schemes first to new employers and then to existing staff.

The replacement for company backed schemes has been company backed contributions which leave the arranging of the pension to the member of staff. This de-risking of the employer’s job was completed when the Chancellor abolished the need for savers to buy annuities in 2014. Since then individuals have had the freedom to do what they like with their money. This has proved popular with the wealthy and the wealth management industry but has left behind millions of ordinary workers for whom turning the pot to pension is the nastiest hardest financial problem they have to face.

The idea, mooted by the DWP in 2023 and reinforced by the Pension Schemes Bill published in July this year that the providers of workplace pensions should be required to provide a default means to turn pots to pensions is in recognition of statistics published each year by the FCA of the mess most of us are making in managing our own pensions. There is a real problem and like all pension problems, it is likely to become a crisis when people start running out of money.

The Australian Government and its pension regulator are rather ahead of us in this and are now legislating that their big DC pension plans offer what they grandly call a Retirement Income Covenant. This is of course a pension to fulfill the common purpose of retirement saving – dignity in retirement through a consistent wage for life.

The immaturity of the UK defined contribution savings system which (after the false start of stakeholder pensions) properly got going in 2012 means that few people reaching retirement today see their DC workplace pension as their primary means of paying themselves in later life.

So far, the issues of turning pots to pensions have been about “sidecar savings”, the main vehicle has been elsewhere. But this is changing and changing fast. Social pressure is mounting as people reach the end of their working life and are faced with choices that they find hard to make.

They are offered support from Government agencies which is insufficient for their needs and they find the cost of getting private financial advice either too expensive or simply unavailable. The attempts so far to simplify choice into pathways offer little more than an annuity. Only 10% of savers use an annuity and while annuities are becoming more popular, the worry is that this is a choice made by sophisticated investors around the current hump in interest rates.

The longer term future of pensions for a 55 year old is an income for on average 30 years, for a couple – longer. This is the duration of their saving for a pension. The Government has rightly identified such a timescale as sufficient to benefit from the equity risk premium. But annuities do not benefit from such a premium, their structure requires them to match assets to liabilities using debt instruments. Pensions enjoy a natural advantage in paying pensions over annuities which translates over time in a 10-15% advantage in payment.

The use of pensions to pay lifetime income seems a logical development for workplace pensions and if employers no longer want to do this, others do. We will be exploring today the capacity of capital markets to back pension promises as a replacement for employers. This development appears to be a logical development of the superfund proposals under consideration by the DWP since 2017 and most recently updated in July this year.