I was not at the Corporate Adviser Summit this week which is probably just as well as I might have lost my temper!
Instead of that, you are getting a blog which looks at the reactions of senior consultants to the challenge facing the pension industry from not providing pensions from workplace pensions.
You can read or listen to the entire article from Corporate Adviser here
Rav, Fearn and Waters
My immediate question to pension consultants presenting us with problems is to ask “what are you doing about it?”
Here is their problem, a solution that is not understood or trusted to deliver.
CDC is about risk-sharing; the pension scheme organises the risk-sharing intra and inter cohorts of members. So far , no party has been prepared to test a model other than Royal Mail. The consultants have failed to organise a model, the master trusts have failed, the employers and their trade bodies have failed. Everyone has sat on their hands and waited for someone else. We should remember that Royal Mail did not create their plan in a fully organised legislative and regulatory space, they created that space by collaborating with Government, consultants and with their staff.
This is all very well, but is it pension savers who should be organising themselves into pools? The CWU acted for their members in helping Royal Mail get their CDC underway but it was not a worker collective, people find the nastiest hardest problem in finance beyond them. They need help- that’s what advisers bring to the party.
Having pointed to the weaknesses of the CDC model and the failure or pension savers to find ways to organise themselves into pools, Waters now turns to Pension (Super) Haven.
I would point out that Pension SuperHaven is infact an approved DB pension scheme with members accruing a DB benefit, it does not need approval to continue doing this. It is looking for guidance from the Pensions Regulator over taking on new liabilities through the transfer of DC pots to DB pensions. The Regulatory ink is hardly dry from the publication of guidance this summer, we are told more guidance is to come. The Pensions Regulator is making it clear it wants to see capital backed DB plans take on risk for members who might otherwise suffer harm, it now has to work out how a CBJP can be employed to help DC rather than DB members. In this, the help of consultants is devoutly to be hoped for!
This of course returns us to the problem with CDC, if no one will go first (or second) then the project fails. Without the active support of regulators, advisors, trustees and sponsors , members will not join CDC or Pension SuperHaven or any other type of innovation. It takes bravery and foresight to create the opportunity and it takes the same to adopt it.
Having moved from blaming pension savers and regulators, the panel moves on to occupational schemes – their sponsors, funders and trustees. Who is to blame for the failure to act? I would have thought that this is a failure of advice. Cannot the consultants recognise that they are part of the problem?
Just what is in mind it is hard to guess. I know of other organisations than Pension SuperFund looking to innovate in this area and I hope that a variety of choices are available to occupational schemes. The “end of the year” is a good target, but why the secrecy?
I think it fair to say that this is a rather underwhelming conclusion. If the extent of our ambition is to stop people buying Lamborghinis with their pensions, we have progressed very little since 2014.
My conclusion
It is not enough for consultants to sit on the sidelines, they need to be actively involved in promoting innovation, encouraging regulators, advising members and creating conditions for scaled change to be achieved.
From the account of the consultant’s scepticism about “decumulation solutions”, I suspect that this is yet to happen.
I challenge consultants to come and talk with us at Pension SuperHaven, share your thoughts , your concerns and your recommendations. We can’t create pensions from pots without your help.
So, getting to scale seems to be the only issue identified – as it was by TPR back in January. No one has come up with any other impediment to Pension SuperHaven that I have seen. Given that Pension SuperHaven, unlike CDC, does not rely upon pooling of longevity risks, but instead has a fully funded sponsor covenant to a ‘solvency level’ of 99% over 5 years ( 99.8% over one year which is higher than insurance); and then reinsures the older lives, what is there not to like?
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The problem is that in general consultants make their money by setting out some suggested objectives for their client and then suggesting how far those objectives can be met by the existing products they can “sell”. It makes their work a lot harder and more expensive if a new product comes along and especially one that may not offer direct or indirect commissions.
I also have concerns that the objectives they lay out for their clients may not be entirely appropriate: For example how far do consultants emphasise to their clients that the present (IHT) tax free status of pension pots passed on death only applies if death is before 75th birthday. After 75 the benefit is taxable in the hands of the recipient with unpredictable tax consequences possibly more onerous than IHT (75% of my designated relative beneficiaries are not UK tax resident, although definitely not tax exiles).
I wonder how far press and social media will create a storm incensing voters in their 70s and 80s if IHT was to be levied on unused pension pots?
Sorry slightly off target with this one (or did I get out of bed on the wrong side this morning?).
In the case of corporate advisors – they suggests the product needs to be in place before they can assess its suitability for their clients. They are comfortable with products they are familiar with and used for years. They may feel the ground has been taken from under their feet if an innovative new product comes along. Comments like they would like to see the product tried and tested before recommending it to their clients shows a failure to understand what the product is – after all a DB Pension with a sponsor’s guarantee and PPF protection is a DB pension!
Are consultants advising their corporate clients that DB Pensions are 50% more efficient at providing an income in retirement for a given level of contributions than a DC alternative (per LCP)?
My understanding is that any pension payments made to a beneficiary after the account holder dies at age 75 or older are liable to income tax (not inheritance tax) at the beneficiary’s marginal tax rate.
This includes lump sum death benefits, which are taxed at 45% if paid to a trust.
However, there may be some ways to minimise the tax impact on beneficiaries:
Beneficiary’s drawdown may allow unused pension savings to remain outside the beneficiary’s estate and continue to grow tax-free for now.
If the deceased’s benefits have been annuitised and the annuity provider pays continuing payments to a beneficiary at their discretion, they should at least be free of inheritance tax for now.
As I said the tax effect is unpredictable depending on the beneficiaries situation at the time of and after the death.
Firstly assets transfers to spouses are not generally subject to IHT. Presumably the pension fund will be subject to the same rules.
Secondly, most annuities are purchased on a single-life basis, and although this is not my area of expertise, I believe retirement annuities (unlike open market annuities) can only specify spouses/partners/and financial dependants as the residual beneficiary.
As you noted transfers into a trust are taxed at 45%, currently higher than IHT.
If the fund is transferred into a pension fund for the beneficiary, it forms part of the beneficiary’s own pension fund:
tax free cash is limited to the total allowance available to the beneficiary and benefits can only be drawn after minimum pension age.
Even with those possibilities the pension contract entered into years ago may restrict the actual options available.
The problem I see it is everyone else thinks it’s not their role. We all need to realise that most of the new solutions needed in the industry from decumulation to impact investment to stewardship for small schemes all have a chicken and egg situation. We need leaders who take the reigns and get all those in a room who can make progress, make decisions, and get over the chicken and egg problem. None of the parties have all the necessary authority or access to do it all themselves but these issues need new solutions such as a group of Consulting firms getting a cohort of similar clients to seed a new solution. Or agreeing for a new nature fund it doesn’t need a 5 year track record as they will do joint due diligence. It’s not just the consultants though. Us trustees have a very powerful position and we can lead across parties as well. We just need to get out of our boxes and realise if we don’t then these difficult issues will be talking shops. Big issues need collaboration and real collaboration across competitor lines and job rope lines.
This is Bobby Riddaway – have updated my profile name just now.
Do agree with you, Bobby about the role of Trustees.
As a trustee I am happy to collaborate with you and other professional trustees considering ESG investing for example.
Hi Henry,
We completely agree, more innovation is needed and we see different forms of risk sharing in retirement for DC members as a key opportunity to address the adequacy challenge.
I appreciate you weren’t at the event so didn’t get to benefit from the full discussion on this.
Through our work on CDC (www.hymans.co.uk/collective-defined-contribution) this year, looking at a broad range of CDC related designs, we are working with the industry to help deliver this innovation.
Credit to everyone involved with the Royal Mail scheme too in getting this off the ground.
We are optimistic about the opportunities for members with new innovation in future, and of course the Pension Superhaven is an example of this.
It takes time and we continue to work hard to help deliver this.
Paul Waters, Hymans.