Nausicaa Delfas TPR CEO

When we lived in a world of defined benefits we knew what benefits were, they were defined by the scheme and save for a few “cash-balance” schemes (which never caught on) , defined benefits are “pensions”, an income paid for as long as the member and any promised partner are alive.

Death is not a factor that matters much to youngsters, we don’t consider old age much either. But it has a habit of catching up on us and for most people, the chance of death arriving is a matter that takes over thinking as we age.

I’ve just read an article about the Regulator’s new DC approach which Nick Reeve in Pensions Expert explores. But despite its length and its attempt to get under the covers by considering DB pensions, corporate trustees and dashboards, the issue of “outcomes” remains “undefined.

“Long-term outcomes for savers”

A regulator likes to define what he or she means but the term “outcome” is not defined. It is a pension in DB pensions world and was an annuity in DC savings world (subbing for a pension). But the idea of a DC savings pot is not linked to an invested pension – unless we are talking “collective” DC.

A Collective DC (CDC) is a way of paying a pension, albeit the definition is not quite as sharp as it is in defined benefit land. A CDC pension is the amount the scheme can afford to pay and in the UK we do not subscribe to buffers, we pay out as much as a CDC pension as can be afforded , paying more in good times and less in bad times than the target agreed at outset.

Even so, if the outcome of a CDC plan is a pension , it is a more defined benefit than pension freedoms. Pension freedoms are nightmares for regulators who have no means of controlling what happens by way of outcomes. All that is constant is a pot of money at retirement which can be taken as an annuity, drawn down all at once or drawn down like a pension. It can be held from being spent as an inheritance or because people don’t know what to do.

It is 10 years since pension freedoms have come in and in those ten years, nothing has happened that can be called a “DC pension”. What we have , as Nick Reeve’s article shows, is a bunch of ideas we hope will somehow make something happen. But I don’t think that DC pensions will emerge from DC having corporate trustees, or people having access to a pension dashboard. I don’t think that people will choose to go back to buying annuities en masse.

My bet is that DWP will restore a default for those reaching the point where they want their money and that the default will look more like a pension than a draw-down. People will find themselves in a situation where they are being paid a pension at a certain rate with a defined level of escalation and a defined means of payment to surviving partner and anything else that trustees will choose as the standard way. Most of all, it will pay for as long as the saver is a spender.

The situation is not one that people will choose. Like auto-enrolment, it will be thrust upon them and they will need to opt-out of doing it. I suspect that opt-out rates will be higher than auto-enrolment but smaller than people estimate. I think there are people who want to hold on to their pot and give it to their children and they may be out buying whole of life insurance policies to cover the inheritance tax. There may be people who don’t think they’re going to live long and will take their pot and spend it and there will be people who believe that their advisers can get them better annuities of manage their pot as wealth in a better way.

All of these alternatives to a pension seem to be self-selected member outcomes and the Pensions Regulator will have to accept that many people will go their own way. They accept this with opt-outs from DB plans and they see people taking CETVs when they have opted in. The Pensions Regulator is not here to stop people doing things for themselves, (though TPR takes a different view of what it considers  reckless behaviour by fiduciaries).

The way we do things in this country which is different from Australia and other compulsory systems is to allow people to take the decision to do as they please rather than have things done for them. If the Pensions Regulator and the DWP and the Treasury and the FCA are lined up on this, then I think a system of default decumulation – introduced through a change in legislation – is a good idea.