Standard Life have published a policy paper which deserves attention, I will give it more attention over the weekend but , having read it once, it strikes me that it is almost impossible for an organisation as large as Standard Life (and its even larger parent Phoenix) to not shape the pension debate. Phoenix owns much of the DC legacy , Standard Life is , to use the paper’s title “thinking forward” operating large DC schemes including master trusts workplace GPPs as well as one of the largest non-workplace pension, the Standard Life SIPP.
It has in Claire Altman, a measured voice in the debate. I have respect for her and her colleagues and I hope they have respect for me , as we are thinking forward together. There is nothing in the statement below that I do not sign up to.
The way people spend their retirement savings is up to them and will vary as people vary. We know from decades of watching people decide (or not to decide) on their investment options that around 90% of us prefer to have decisions taken for us and about 10% exercise control of our savings. This varies from hands on SIPPs to hands off master-trusts but this is the way of saving and investment.
We also know – from 10 years of reports on retirement and income savings, that people – offered total freedom as to how to spend their savings – show trends in their behaviour but do not generally organise themselves in a way that makes sense to policyholders. We know that on average 10% of us buy annuities, most of us with small pots under £10k cash them out and , apart from those who are properly advised, the rest of us are waiting for something to come along.
Judging by the regular surveys commissioned by large financial services companies, about 80% of people say they want a consistent income from their retirement savings, an income that lasts as long as they do. I have chronicled all this over the past 16 years on this blog and in 2018 set up a company “AgeWage” to help people get a wage in later age.
More recently, I have been working with a team to create a Pension SuperHaven, a default solution for savers who want a wage in later age that provides better outcomes than an annuity without compromising financial security.
The Standard Life solution
Standard Life want a regulatory landscape where savers take sensible decisions while being supported by trustee and provider.
This paper suggests that while auto-enrolment has been a policy success in terms of increasing the amounts being saved by a proportion of the working population not saving 10 years ago, it has been a pension policy failure. The pension policy failure has been made worse not better by the pension freedoms, we now have less pensions and far more pots.
Standard Life want to turn auto-enrolment from a savings success to a pensions success and I agree with them.
However there are massive headwinds to doing so, not least the loss of a pensions culture in this country. The payment of a pension is now something that many people feel should be left to the insurance industry. Many in occupational pensions regard an annuity as the gold standard even though (or maybe because) it costs about 20% more to insure a pension scheme’s liabilities than to run them on over time.
There is evidence that pensions provide considerably better outcomes for individual savers than annuities and we estimate that on a whole of life basis, pensions can provide 20% better outcomes than annuities, not because annuities are bad value, but because they are designed for a different problem, a problem where there is no “pension provider”.
Standard Life are one of the largest annuity providers as well as running several large pension savings schemes. It would be easy for Claire and her team to have simply returned to the annuity as the solution. But they haven’t. To their great credit, they look beyond the fully insured solution and ask what alternatives can be created.
I welcome what Claire is saying and hope that what Standard Life and other large pension providers create is thinking forward not backwards.
Happily, most of the solutions needed to meet the challenges of the future are already in place. The challenge is to find ways to reconstruct pensions to leverage the new tools we are being given – the pensions dashboard (s), new and better sources of investment return , a well-formed and stable reinsurance market and access to capital lined up to take pensions forward.
But most importantly, there is demand, demand from rich people like me and not so rich people who – like me – want a pension not a pot. It is now important that we translate good ideas into pensions that are paid to people for the rest of their lives. If we can do that, we will turn AE from a savings to a pension policy success.