Decisions on how our money is invested are being taken by DC investment managers on our behalf. The result of disparate strategies is that some savers are being introduced into funds that delivered 16% more than others. So one saver would have a fund of £100,000 at the end of their saving lifetime while another would get £84,000, for the same contributions and returns for the last twelve months of their career (so far).
The Corporate Adviser allows Rita Butler-Jones to pronounce on how DC pensions should work. This is a summary of her pondering.
Rita is head of L&G’s DC pension proposition.
I think that most people who have money taken from their pay expect that money to deliver the money back as a pension. I have spent a 35 day holiday in a hospital that has felt like a hotel. I have spoken to those supporting me from consultants to people who clean up the mess we patients make. The expectation is that they will be able to retire on a decent amount when they get to state retirement (67 for most of them). They do not consider the size of their pension pot or the way their pension is paid them. They want to know what the impact will be if they buy extra pension, a great proportion of the population do not consider the questions that worries Rita and L&G.
The reality is that most people don’t have a clue and what they get in retirement is down to chance. L&G can discuss analysis of their data but they don’t know what people who are patients and suppliers at hospitals like the one I’m at, are expecting from their pensions.
I am sorry, but having worked as Head of Sales at Zurich before it sold out to Scottish Widows, I know that the discussions between product providers at ABI meetings and internally, focusses on maximising the profitability and returns to the shareholders. Actually the idea of being required to offer default investment and default of default pensions from personal saving is not on the agenda. The value of running structures to shareholders and to management is what matters,
The reality of outcomes from one saver is hugely different from one investment income to another. There is no pension outcome, just choices of taking cash using a drawdown, buying an annuity or just taking the pot in one go. There is no default in DC, but the people in this hospital can explain what they expect from pension saving, What they describe is like an extension of their state pension.
Let’s be clear about this; what people are saving for is, by default, a pension paid to them based on their pension pot and people are completely misled about the performance of their savings and the idea of how much they will get as a pension based on their savings. Most people – as Rita said – give up on swapping their pot for a pension and just cash-out or partially cash-out.
It is shameful that DC pension providers see this as an acceptable. It is time for the Government make it necessary for a default pension to be offered, one that people can choose to opt-out from. The outcomes of savings should be measured as “value for money” compared with other savers and trustees who fail to live up to the standards of others should be forced to hand their money on to others so that people get an idea of what they are getting.
The current mess into which our money is invested is a disgrace. These two documents put together by the excellent Corporate Pensions, tell me that DC is a mess and needs a better regulation. May that happen in the second part of this decade.
A great way to create more indifference, apathy, lack of engagement, and then blame attitude when it doesn’t turn out well.
Pensions don’t need making more automatic, they need the people putting lots of money into them to care more about it.
I think people care more about income than wealth, unless they are wealthy and don’t need to be worried. I don’t see much coming from the pensions dashboard to help.
Henry, very eloquently you appear to be making the case for defined benefit or targeted annual pensions (CDC) for the individual.
We really need to ensure we have a legislative and regulatory regime that is designed to allow occupational pension schemes that provide these benefits to thrive. Since 1993 every piece of legislation and regulation has been entirely focused on pension scheme failure. We urgently need the playing field to be changed and the legislators and regulators not to be lobby fodder for those with vested interests in providing arrangements that maximise profits for the providers, including the advisory industry.
At the least the DWP Committee in their DB Funding Report issued in March this year seemed to be getting it! To me this is far more pressing than considering the adequacy of DC auto-enrolment contributions.
Thanks Mr Oldie. I agree. The regulatory bias towards supporting contract based pot fillers rather than addressing the pension issue. Let’s hope that Emmma Reynold and team look at things this way and we approach the problem as the problem emerges to those nearing, at and in retirement.
When I was in practice as a qualified adviser as oposed to a tied agent or company representative it was the client who defined the desired outcome adn our task was to find an acceptable risk profile to achiove the desired result, Often the budget of contributions had to rise in order to reduce the risk.
CLients often required guidance as to the benchmark to choose and in the latter years the living wage was useful and the question was then about the multiple or fraction of that target. (CEO wages of 50* average employee needs to be corrected against this greed.)
Investment performance of UK pension funds is influenced by several key factors: We need to recognise that pulling one lever has an impact on all the others and artiles comparing one dimension to this multi dimensional surface are a waste of ink.
Clinets no matter how sophiticated need a simple explanation of the moving parts, here are some clips from our knowledge manual.
1. Inflation: Inflation erodes the purchasing power of money over time. Pension funds aim to achieve returns that outpace inflation to ensure that retirees maintain their living standards. The UK’s Consumer Prices Index (CPI) rose by 2.3% in the 12 months to October 2024[1](https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/latest).
2. Taxation: Tax policies impact pension funds at various stages, including contributions, investment growth, and withdrawals. In the UK, contributions to pension funds typically receive tax relief, but withdrawals are taxed as income[2](https://www.gov.uk/tax-on-pension).
3. Leverage: Leverage involves using borrowed funds to increase investment exposure. While it can amplify returns, it also increases risk. Poorly managed leverage can pose significant risks to financial stability, as seen in the UK pension fund crisis in 2022[3](https://www.bankofengland.co.uk/speech/2022/november/sarah-breeden-speech-at-isda-aimi-boe-on-nbfi-and-leverage).
4. Risk: Investment risk includes market risk, credit risk, and liquidity risk. Pension funds must balance the need for high returns with the need to manage these risks to ensure they can meet their long-term obligations[4](https://www.politico.eu/article/why-we-should-all-be-worried-about-the-crisis-at-uk-pension-funds/).
5. Desired Outcome: The primary goal of pension funds is to provide a stable and inflation-proofed income for retirees. This involves selecting a mix of assets that can deliver consistent returns while managing risks. Diversified investment strategies, including higher allocations to private markets, can improve risk-adjusted returns[5](https://www.gov.uk/government/publications/pension-fund-investment-and-the-uk-economy/pension-fund-investment-and-the-uk-economy).
6. Annuity Rates: Annuity rates determine the income retirees receive from their pension savings. Current annuity rates in the UK vary based on age, health, and lifestyle. For example, a 65-year-old with a £100,000 pension could receive an annual income of around £7,308 from a single life, level annuity[6](https://www.hl.co.uk/retirement/annuities/best-buy-rates). An RPI indexed joint life annuity would produce a starting oncome of £4000 and would take 18 years to recover the purchase price. ( from memory of figures I had 4 monts ago.)
By considering these factors, pension clinets cooperated in order to achieve the objective of providing an inflation-proofed living wage for retirees. If annuity rates are to improv then the asset classes that insurance companies invest in need to take more risk otherwise draw down is hard to beat.
Risk in the portfolio is assumed that the client takes the risk, by finding broader shoulders to take the risk it was suprising what exceptional returns over the lsat 20 years could result.
I have taken one such fund (currently £43M) its return has been r×100≈19.32%r×100≈19.32% with a 15.9% underpin. This fund is likely to have reduced returns in the next 10 years to be aproximately 7% +RPI. If interestd and you ahve £10M let me know.
The problem with a personalised approach to retirement is that it is rarely (unless you are already seriously ill) possible to predict how your life will develop over the next 20+ years. It is probably much easier to live around a known income coming in rather than to hope that you can accurately predict the future.