The IFS rehearse old ground

The IFS has produced a lot of material and organised a well run seminar to convince us of what we know, that savers are getting older and in need of their savings back in a way that gives them the best retirement.

They get their language wrong when talking of “wealth”. Pension Wealth exists largely because it has been taken out of DB pensions in the transfer craze in the second half of the last decade. Like much else in pensions, that craze was short lived and for those who have been saving diligently through payroll deductions, “wealth” is the wrong word.

Whereas a typical DB transfer payment was £400,000. only a few DC savers get to this level of “wealth”.  The modelling done by IFS assumes a £100,000 retirement pot and the modelling shows that using a pot a quarter that size, realistic incomes are providing prudent income levels using individual drawdown gives a retirement income between £4,000 and £6,000. These are realistic for individual pots allowing them a 3% real investment return from which is taken 0.7% as a management charge.

What this modelling tells the IFS is that individuals can get neither the security of knowing their money lasts as long as they do or the satisfaction of knowing their money is well invested. The IFS tone both in its report and in yesterday’s walk-throughs aspires to prudence with “pension wealth”.

Managing wealth in retirement is difficult, and policy design in this area is not straightforward – particularly after the near-compulsory annuitisation of DC pensions was abolished in 2015.

Whatever its merits, we have found little support for returning to a pre-2015 situation. But change is needed to help people navigate how to make good decisions over how to draw on DC pension wealth and to help people balance the benefits of flexibility while limiting some of the risks they face.

This report therefore sets out a set of policy suggestions that for many should reduce the risk that they end up with low living standards later in retirement as a result of making poor decisions on how to draw upon their DC pension wealth.

The conclusion after 53 pages is that flex and fix – the idea that Steve Webb and LCP gave them, is best for the public. This means people being nudged into annuitisation later in life and  is not something I look forward doing when I could be in my dotage. 

Paul Todd of Nest has a different view.

Having heard two rather dull presentations from IFS, it was good to hear from Paul Todd, a quite different approach than the “flex and fix” suggested by IFS.

He stresses the need for all 13m people Nest look after to have the confidence to spend an income early in retirement without worrying that their money later on. Unlike the IFS he does not suppose that a decision need be made to “fix” but he talks about collective solutions where the process of getting protection against living too long is arranged by Nest (however).

You can hear Paul speak after 40 minutes of this YouTube but to really understand Paul’s and Nest’s radical difference, listen to his answers to questions  (minute 55 onwards)

I have to admit, there is a lot of good stuff in this video as there is in the IFS 53 pager but the Nest section and in particular the answers to questions by Paul Todd that suggests to me that they have moved beyond the requirement of individual savers to manage their “flex and fix” and towards the kind of collective solution Britain used to have prior to the abandonment of pensions and even compulsory annuities.

The IFS are clear that there is no wish to go back to compulsory annuitisation (for all but the “wealthy”), but they have no replacement, indeed “flex and fix” is simply “annuity applied later”.

I am very grateful for the IFS for giving Paul Todd the opportunity to talk and explain what Nest want to do. I am quite clear in my head that Nest have got it and it would be good for the IFS to get it too.

What we need is for Nest to share their projections for their collective retirement solutions, the pension solutions for the not so wealthy!