pot

The discussion on how people get paid pensions is beginning to gather pace and about time too!

There are two competing approaches.

The first is collective and is what has given us defined benefit pensions, This has shrunk from its peak at the turn of the century when it was common for larger employers (and many smaller ones) to offer the promise of a pension as part of a contract via a trust set up for the purpose. Smaller companies could plug into “master trusts” such as the Pension Trust. The Government had set up after the war, pension schemes for the NHS  teachers, police, firemen and other groups of public employees. While not funded, they had broadly the same basis of promise (service and salary) as the private sector. The local Government Pension Schemes was for public servants but came to be used by many in the private sector, it was collective and funded. The defined benefit collective approach to paying pension remains the only game in town for large parts of the workforce in this country.

The second is not collective but could best be called “personal” in that individuals have their own entitlements which are unique to them depending on the returns on investments held for them under trust or contract to pay them a benefit in later life agreed by the individual with freedom as to the pension they choose. This can include no pension and mostly does and the entitlement has come to be known as the pot. The idea that the pot might pay a pension  (or at least an annuity) was accepted till 2014 and may well become the default for those in personal pensions (where the promise is about the promise not the benefit).

There is a third approach which has been discussed since the start of the century and has been slowly taking shape in the past ten years. Known as collective (C) defined contribution (DC) it offers a defined payment into the scheme and a pension based not on a personal pot but on a collective ability to pay the member a pension (a regular income for as there are people defined as getting it paid are alive.

From collective defined pensions to self invested personal pensions

The master trust approach which was initiated by Defined Benefit schemes has become popular as a way to pay personal pensions and there remain many group personal pensions that have contracts to pay pots but not much else which is in common with other personal pensions. Personal pensions like to be known as Self Invested Personal Pensions to explain they have nothing to do with collective pensions and everything to do with personal freedoms.

This variety of approaches to the responsibilities for paying people money in later life is more or less covered by a single tax code but by two regulators, the FCA covering the contract based pensions and the Pensions Regulator the pensions managed under trust. But it’s possible to pay retirement income (as annuities) under the auspices of the FCA and another Treasury overseen regulator- the PRA. Meanwhile Trust based pensions including CDC pensions and also pensions which are personal but held within trusts (own occ and master trust as they are becoming know) are regulated by the Pensions Regulator.

Confusion for the public

I expect that most people who have read the last 500 words are familiar enough with the landscape of retirement savings to understand what I have said. I expect some who were a bit confused may feel a little more confident but I would expect the vast majority of people who are saving into one of the schemes I have described will remain confused.

There are enormous differences that go on beneath the service that cover all kinds of requirements. They include what can be invested into, what must be held back to meet promises, levies to a scheme set up to bail people out whose schemes get into trouble and freedoms from much of the above for schemes that guarantee nothing but work to best endeavours (basically everything but defined benefit pensions).

Because of the differences you may consider DC, DB or CDC “gold plated”, indeed you might include something you exchange your pot or pension for – an annuity – as the 24 carat gold pension, especially if you consider insurance companies 24 carat gold in financial terms.

Value for our money.

Because of all this confusion among the public, we have trustees whose job it is to make sure we get what they consider value for money, make the decisions for us we can’t make, while giving people options to do things differently via opt-outs. The decisions of the trustees are known as defaults and they have applied since the introduction of workplace pensions under auto-enrolment (2012). Now defaults are going to be offered to pay income at retirement and defined benefit, personal drawdown, annuities, collective drawdown and even collective pensions funded by defined contributions – are all being considered.

The decision as to what is best is made by trustees with advice from experts from their scheme executive (provider) to dedicated investment , actuarial and financial advisers.

I do not think we have properly explored the differences available as there are different varieties of DB pensions (Superfunds and Capital Backed sponsors) and different combinations of delivery of income (CDC mixed with collective drawdown  or annuities for instance).

Making sense of choices

This vastly complex and wonderful approach to paying us back our money looks even more contentious than the accumulation of the savings. My job will be to  make sense of what is happening and to play a part in delivering through my little AgeWage!