I think the scale program instigated by Government to get DC plans “valuable” is the wrong measure.  I’d like to say why. Government can achieve its aim of VFM for DC schemes better. Government needs to start thinking of VFM for DC savings as “the value of pensions  for the money saved”.

Illustration depicting a computer screen capture with a value for money concept.

The Government’s own DC working pension is valued at more than £36m, well over the £25bn value that the Government has in mind. But as a small holder in Nest myself, I can tell you it is not a pension scheme, it is a saving scheme that provides a pot, The people at the top of Nest are aware of this, they would like to make it a pension scheme which, based on the tiny average pot size might add additional pension to those who need it – additional to the state pension, Being in Nest at minimum auto-enrolment payments is not going to enable people to retire (on its own), The numbers in the picture represent the kind of monthly contributions going in to pensions at the bottom end of the earnings spread.

People like to talk about the increased number of people in “pensions” as a result of auto-enrolment. What they mean is that there are people who are building up amounts of money that will ensure they are not able to beat the means test and get pension credit. The magnificent Gareth Morgan and others have shown that AE is not helping those with low savings and low incomes.

We are depriving many of these people of the tax incentive to saving by putting them in net pay schemes which don’t pay the £10 above to those who don’t pay tax, Schemes like Nest and People’s Pension do, one of the two L&G master trusts don’t, many of the large auto-enrolment master trusts and sole employer schemes don’t. In short, it’s a lottery for those with low incomes.

It is even more a lottery for those on low incomes when it comes to retiring. If you are in a Government scheme (whether funded or not) , you get an additional pension based on your final or average salary with the Government employer. If you are in a DC scheme you will get the opportunity to spend your pot how you choose. Your choice options shrink with the size of your pot. People with small pots do not get offered annuities, they can’t get advisers to talk to and the chances of managing their pot to provide an income are slim. The vast majority of small pots are simply taken into bank accounts and become part of a capital buffer. As it usually replaces an income (at retirement) , this is not what the Government attended. The Government’s £36.6m DC pension (NEST) does not pay a pension.

There are some companies that have decided to do more about the issue of pensions for all. Royal Mail have established a CDC plan which does provide a pension. A lot of folk have criticised for it offering a pension that is not guaranteed by Royal Mail but paid out on the basis of careful planning and a trust that markets do what we expect them to.

There are some companies that still provide the funding to ensure they can provide pensions with near enough 100% certainty. These private companies run defined benefits that pay pensions, some still provide offer membership to new employers.

For those who are unlucky enough to have a pension paid by a company who can’t pay into the pension when it gets into trouble, there is the Pension Protection Fund that takes over the obligation. It is a sad time for the employer which goes into receivership. We hear of very few DB schemes going into the PPF.

We hear of schemes in surplus choosing to hand over that surplus to insurers to manage the problem. This is a waste of investment opportunities which the Government has spotted. It hopes that this spare money will be invested to do good things in the future . We haven’t worked out what “good” means.

I would like companies with DB schemes in surplus to upgrade their DC pensions to CDC or even DB plans (though I recognise that these schemes need to be self-sufficient). This is not the time or place to talk about commercially run CDC and DB schemes where the sponsor is a commercial pension provider.

So far there is no commercial pension provision but there ought to be. Organisations like those that manage Nest and People’s and the commercial pension providers should be aspiring to pay pensions not pot – and to be doing this with the help of external or internal financing. Royal Mail have shown the way on CDC, more should follow.

As for the Government’s wish to get value out of DC by creating schemes with more than £25bn, you are barking up the wrong tree. The reality is that DC master trusts could do much more to provide people with pensions and through the investment of pension monies, the country with pensions that offer long-term capital.

I would like to hear from Nest, when it has worked out to help people when they choose to have their money, I would like to see a default pension that makes their lives easier as they grow older. It may not happen as the first stage but I think that the big DC schemes should be aspiring to pay pensions. I would like to see large employers (you know who you are) , putting pressure on trustees to offer pensions (not just annuities). If these are non-guaranteed CDC or commercially backed DB, I mean lifetime incomes that offer an AVC to the state pension. I would like to think that some of these pensions will pay more than the state pension.

The aspiration of DC savings plans should be more than to manage £25bn, it should be to give a valuable pension benefit for the money saved.

No ordinary saver is thinking like this