Two things
- Everyone I know who gets the state pension never talks about how they got it
- People struggle to claim their workplace pension – whether DB or DC.
I won’t go on about my experiences of taking DC pensions. A recent report suggests that more than 10% of savers have suffered attempted or actual scamming. I can understand why drawing benefits is hard and harder because of recent tax changes. All the same it should not be as difficult as it is.
But DB pensions are hard too. I finally got back home late on Friday after a few days in Liverpool. My partner, who is a pensions person, told me of the help she’s given a close relative retiring out of the teacher’s pension scheme (with AVCs).
She recited the difficult decisions around early retirement, about CARE v Final Salary, the choices around the AVCs and the use of chatbots and overseas call centres.
For ordinary people- when we’re drawing pensions we are all ordinary – the choices are really hard, because they are choices that have lifetime implications.
This is why pensions are so important and why it is right that we have a Pensions Regulator whose focus is on getting people paid their promises in full.
It is also why I consider the pension freedoms an increasing societal danger. So long as we ask people to rely on rules of thumb to estimate their “chosen” income in retirement, so long we give them a level of uncertainty that lives with them , not just at the point of the decision but for the decades of retirement to come.
Paul Todd, speaking at the PLSA last week made an excellent point that ordinary people do not differentiate between the certainty of an occupational pension and an annuity, they are not hung up about the type of covenant , they trust that they are protected by trustees, insurers , regulators and by some form of safety net.
None of these things come into play when you are in drawdown. Your mistakes will not be bailed out by FSCS or PPF, there are no trustees to set the rates for you, the insurers are not guaranteeing your decision, you are on your own.
This is no small matter. As we move towards the third decade of the century there will be people who have pension pots worth more than anything else they own. We know this from more mature DC systems.
But where Britain differs from other countries is that we have succeeded in providing defined pensions to millions of us. Despite the occasional failures from Maxwell to ASW, we have created a lifeboat that is capable of underwriting large schemes when they get into trouble. Employers have stood behind schemes and now capital backing is in place to step in where sponsors fail or want to withdraw. The insurance option is – though expensive – available,
It is to our credit that we have stood behind our promises and created a regulator and a lifeboat that protects members. Which is why I believe that the future of DC is DB (or CDC if risk-sharing can be supported commercially).
Even the DB decisions which my relative was trying to take are hard. They are loaded with questions that are hard to answer, questions that can only be answered by making assumptions on market returns, inflation and longevity that most of us are ill-equipped to decide on.
But the difficulties of making these decisions in DC are so amplified that for most of people “pensions” are a matter of hit and hope. Without a safety net DC drawdown is too hard. People put trust in advice but even advisers cannot manage the waves. In their world the best lack all conviction while the worst are filled with a passionate certainty they have the answer.
By comparison, the state pension , that has no cash sum, no transfer value, no choice of benefit calculation and is paid in full from a certain date till death , remains the most simple trusted retirement benefit we have.
We must strive to keep options for people as simple as we can, to provide certainty and protection to people who haven’t the confidence to take decisions for themselves. We must be understanding of the difficulties of the decision making process and be patient in helping people towards the choices that most suit them.
This is a huge endeavour which is what the pensions industry is really about. The PLSA for the first time in my memory, spent more of its autumn Conference talking about spending rather than saving. We do not have a savings problem in this country, but we find it very hard to spend our savings and that is where we must put our energy over the coming years.
The simple answer to the question is “choice”. We want freedom but when we have it , it is burdensome. We are now reaching the extremity of choice and soon we will be looking to simplify through “done for us” solutions that demand little for us than acceptance that we are using an option that is right for most of us. That may sound like a cop-out to libertarians but it sounds a lot more like the state pension to me. People like and trust the state pension yet its the one that gives least choice – go figure.