Thanks Richard , I hear your frustration and wonder when smart marketing makes SMPI projections worthless. Individual choice is driven by a Fear of Missing Out and a lifetime being told by regulators to get the best deal that the market will offer you. It is the FCA’s mantra but it is not what people end up doing, they end up defaulting to what seems obvious, typically there is a default that emerges as the easiest thing to do. This has been to cash out the pension pot – not what the plan for a pension system or even pension freedoms was meant to be.
Here is the increase of £6,000 in the pension pot that Government would like to think we could enjoy by using a more sensible default as a means of accumulating cash in the pot
But hang about, you are talking about income from the pot and Alice is talking about cash from the pot and all the talk about “value for money” leads to what doesn’t happen. People do not turn their pots into pensions in a consistent way; there is no default for retirement and to think we are going to get to a better retirement by getting fees down and diversification of asset allocation is going to mean nothing to the general public.
We need instead to explain that we are putting the control of our money in the hands of a small group of schemes, currently led by Nest, Peoples Pension , Legal and General and Lifesight, who have the resources to do the best for us. People get the idea of megafunds and they get that so long as they are properly invested by trustees who have their interests at heart, they are ok.
What we need to be doing, to explain what they can expect from their saving, is to agree a target for income based on a return based on conviction of what a default decumulation return can be. Right now it is based on the annuity return that we consider the benchmark and if we put an index of annuity returns out there, it should be updated regularly (say every month). Personally, I think that telling people the best we can do for them for the last twenty five years of their lives is invest in bonds is debatable. I would not invest a pension fund that way nor would the Government want me to. I would want to get more than the annuity rate because I was investing not just for today’s retirees but for groups of people getting to retirement each year for ever.
This chart shows with the blue line what we could expect from an open pension scheme and what happens when you close it off, it falls away with the green line and we end up meeting the liabilities we promised with the annuity without all the upside of the “Open Scheme Sweet Spot”.
I know that Alice and you are not at retirement yet and that accumulation is what matters to you , but there is a generation of people – me included – who want an income from their pot which does what the blue line can do and deliver better returns than annuities (effectively what “asset income” is if you are in an “endgame”).
The discussion we should be having about what people get when going on the dashboard and seeing the income they have secured is a lot more about whether they get the blue or green line. I will argue that I want the blue line of an open pension scheme not the green line of an annuity.
It really is best that we get on with getting collective defaults in retirement as well as collective defaults in accumulation. We need to think about what the investments of pension schemes can be relative to annuities and we need to consider how to deliver collective longevity protection.
We should not be worrying about minute differences on SMPI projections , we should be thinking about whether we want an insured or invested retirement system. I say let’s have a proper discussion over that and stop faffing about the kind of nonsense in the Government’s projected £6,000 tweak to the capital projections in the Pension Investment Review.
MaPS annuity service ; well laid out but not revolutionary